Wary India players will sit on the sidelines

Mumbai : Investors in Indian shares will probably sit on the sidelines as the year winds down, wary the government would press the alarm button and squeeze money supply sooner than expected to calm rising public protests against soaring food prices.

Even though the authorities have taken pains to drive home the point that the upward pressure on inflation is being caused by supply shortages of food items, which cannot be controlled by tightening monetary policy, there are signs the government will want to show it is acting.

"Prices are a major area of concern and we shall have to address it," Finance Minister Pranab Mukherjee told parliament last week. "Whatever steps are needed, we will take those steps."

The wholesale food price index leapt by almost 20 per cent in the week ended December 5, official data showed. Prices of potato more than doubled from a year earlier, while vegetable costs rose 41.09 per cent, pulses climbed 40.1 per cent and wheat firmed 13.9 per cent, the government said.

Crops damaged

The jump was caused by the worst June-September monsoon rains since the early 1970s and then floods in some regions, both damaging crops across the country. As the world's second most populous country began to make up the shortfall through imports, prices leapt as far as in New York.

Economists are worried the rally in food prices will percolate to manufacturing products, triggering a full-blown inflation crisis. To head this off, central bank is now widely expected to tighten money supply through an increase in the cash reserve ratio — the portion of deposits that commercial banks have to keep with the Reserve Bank of India (RBI) — probably before the year end.

"I came for a routine meeting," RBI Governor D. Subbarao said on Friday, after discussions with the finance minister. "I spoke about the macro-economic situation," he added, without elaborating.

The central bank is scheduled to review policy on January 29, but it can step in earlier and make changes.

"When growth is subdued, inflation can be ignored," said Sonal Varma, an economist at Nomura Holdings Inc. "However, with both growth and inflation surprising on the upside, we believe that a policy action is imminent."

Economy expansion

India's $1.3 trillion (Dh4.77 trillion) economy, the third-largest in Asia after Japan and China, could expand more than 7.75 per cent in 2009-10, the finance ministry said on Friday, as stimulus measures set in place after the global crisis bear fruit.

"With the latest GDP data on second quarter (July-September) of 2009-10 being higher at 7.9 per cent, the growth outlook for the next two quarters and for the whole year is likely to be in the upper bound of the range predicted; and may even exceed it," the ministry said in a report.

The top-30 Sensex fell 2.3 per cent last week to 16,719.83, its biggest weekly loss since October in anticipation of monetary tightening moves, but is up 73 per cent on the year.

Investment guru Marc Faber said the market could drop as much as 30 per cent after more than doubling since hitting a 2009 low in March.

"Valuations are not as cheap as they used to be; a 20 to 30 per cent correction won't be unusual," Faber told a news conference in Mumbai. "The markets don't keep going up in a straight line."

However Faber, who publishes the acclaimed Gloom, Boom & Doom Report, said he remained upbeat about India's long-term potential that is driven by domestic consumption — which had helped the country to cushion the impact from the global economic meltdown.

"Even if interest rates go up somewhat, it won't be disastrous for Indian stocks," he said, adding he favoured banks, infrastructure and mining. "In the long term it remains very attractive because of the domestic consumption play."

— The writer is a journalist based in India