Business | Markets
Worrying week ahead for Indian shares
More turbulence is in store for Indian shares this week, with Citigroup's woes topping the list of worries that could trigger another wave of panic across world markets. And if an expected rate cut does not come through, it will add to the gloom.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 23:27 November 22, 2008
More turbulence is in store for Indian shares this week, with Citigroup's woes topping the list of worries that could trigger another wave of panic across world markets. And if an expected rate cut does not come through, it will add to the gloom.
The big concern is about foreign portfolio outflows, which have reached $13.5 billion (Dh49.6 billion) this year in contrast to a record inflow of $17.4 billion in 2007.
"We will be staring at accelerated outflows if Citi's problems worsen," said equity trader Kevin D'Souza. "It could increase redemption pressures from equity funds as investors take refuge in safer havens like bonds or gold."
Citigroup's trouble could also weigh on software services companies, particularly Tata Consultancy Services which had bought the US bank's outsourcing unit in October for $505 million along with a long-term deal of assured contracts worth $2.5 billion a year from Citigroup.
Adding to the problems for India is a likely sharper slowdown than what the authorities are willing to admit. For months the government and the central bank believed the global financial crisis would not seriously dent India's robust growth of nine per cent or more in the past three years.
Belatedly the government has said the expansion in 2008-09 would slow to between 7.5 and 8 per cent, but most economists say the growth will be much slower. Securities firm Macquarie said last week India's growth faced downside risks because of the global crisis in the current year and the following year.
"On our current forecast, GDP growth is poised to fall to a seven-year low of six per cent in 2009-10 from an estimated 7.2 per cent in 2008-09," Macquarie analyst Rajeev Malek said in a note.
JPMorgan lowered its forecast for India to 6.7 per cent this year from its earlier projection of seven per cent, said it expected 6.2 per cent growth in 2009-10 against 6.8 per cent estimated earlier.
"The moderation in exports, small business output, and real estate related activity could crimp urban consumer spending as employment and household income growth slackens," JPMorgan said.
Citigroup, which twice cut its growth forecasts for India in the space of a month, sees growth in 2008-09 at 6.8 per cent even with aggressive interest rate cuts. "Unfortunately, over the past few weeks, incremental data both on the domestic and global front has been worse than anticipated. At this juncture, data points to a marked slowdown in consumption and investment," the bank said last week.
Action lacking
The Reserve Bank of India (RBI) has slashed its main short-term lending rate by 1.5 percentage points to 7.5 per cent in the past two months, but this has been too little to revive sluggish consumer spending. Companies from steel to car have cut output and sales have been dwindling across sectors.
Prime Minister Manmohan Singh and Finance Minister P. Chidambaram have said they would do more to stimulate the economy, but action has been lacking.
The blue-chip Sensex index fell five per cent last week to 8,915.21, swelling its losses this year to 56 per cent. The slide would have been more but for a 5.5 per cent bounce on Friday, the first rise in eight sessions, after slumping to its lowest close in three years a day earlier. Equity trader Rasesh Shah said expectations for an interest rate cut had triggered short covering ahead of the weekend, but if it did not materialise the market could resume its slide.
JPMorgan said it expected the RBI to cut its repo rate, at which it lends funds to banks, by another 50 basis points and along with an identical reduction in reserve requirement by its January policy review.
"Alternatively, the RBI could cut the repo rate by 100 basis points - in which case the reverse repo would also be reduced 50 basis points in order to keep the gap between the repo and the reverse repo rates at 100 basis points," it said.
ICICI Bank Chief Executive K.V. Kamath said interest rates in India have to come down by another 2-3 percentage points in order to stimulate demand in the economy.
Property developers have been one of the worst hit because of the slowing economy and tight spending. Shares in DLF Ltd, India's biggest listed realty, have tumbled 80 per cent this year, must more than the benchmark Sensex.
Falling stock prices and rising foreign fund withdrawals are putting the rupee under severe strain. Last week, the rupee plummeted to a record low of 50.60 per dollar taking its losses to more than 22 per cent this year and traders expect the currency to head to 51, probably this week.
- The writer is a journalist based in India
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