Expanding economy can offer investors good opportunities

Delhi: With uncertainty hobbling the global economy, investors in Indian shares will keep a close eye on the monthly inflation this week to gauge the near-term outlook for a market that has been one of the world's worst performing this year.

After increasing interest rates by 3.25 percentage points over 18 months, the most by any central bank, the Reserve Bank of India (RBI) had said it will continue with its tightening cycle to control persistently strong price pressures and markets have been discounting a quarter-point rate rise in September.

Policymakers in New Delhi, however, are likely to lobby for a halt to the rate increases in the wake of the gloomy outlook for major economies such as the US and Europe which could further slow down domestic growth.

While the government has lowered its growth forecast for the economy to 8.5 per cent for 2011-12 from upwards of nine per cent, many private-sector economists have slashed their projections to below eight per cent citing the steep rate increases and falling consumer spending.

Revival

"With so many uncertainties clouding the outlook for growth, there is a good chance of the RBI to pause," said equity salesman Rasesh Shah. "If that happens, it could trigger a revival in foreign buying, especially against the background of troubles in Europe and the US."

A fall in commodity prices, particularly oil that India imports for nearly 80 per cent of its consumption, should ease the pressure on inflation that has remained near double-digits for two months in a row.

The July inflation data is likely to stay around the same level, but the possibility of an easing trend could be sufficient ground for the RBI to pause in September.

For the top-30 Sensex, which has fallen 18 per cent this year, a pause could herald a turnaround. Foreigners have dumped Indian shares worth $1.3 billion (Dh4.7 billion) this month in the wake of the global markets turmoil, after buying about $2.5 billion (Dh9.1 billion) in the preceding six weeks.

"India offers a great opportunity after the shakeout," said equity trader Monish Dalal. "There are many blue-chips available at bargain prices. It is just a matter of time when some large funds are going to scoop them up."

An Indian economy expanding at just under eight per cent is a better bet than debt-scarred Europe or a possible contraction staring at the US, he said.

India has been battling price pressures for almost two years and the rate rises have taken a toll, but the worst seems to be in the prices.

Car sales in July slumped nearly 16 per cent, the first monthly decline in two-and-half years, as dearer borrowing costs and higher prices of fuel and vehicles combined to dent demand in the world's second-fastest expanding market for vehicles.

"I don't think there is lack of demand. I think there is lack of conversion of demand into purchases," said Vishnu Mathur, director-general for the Society of Indian Automobile Manufacturers.

"Interest rates and fuel prices are going to make a difference," he said.

Many first-time buyers had put off their plans or changed to motorcycles or scooters to save on costs. Motorcycle sales grew an annual 10.5 per cent in July to 785,278 units,

Strong resilience

Data on Friday showed factory output in June climbed a better-than-expected 8.8 per cent from 5.9 per cent in May, suggesting strong resilience in the economy which had remarkably withstood the onslaught set off by the world financial crisis three years ago.

Robust capital goods production helped the expansion, but the consumer-driven components remained weak.

The widely tracked Sensex which shed 2.7 per cent last week to 16,839.63, posting a third consecutive week of declines, could slip below 16,500 but that should be the bottom, Dalal said.

"It is time to start building a portfolio. You may not get another shot at such prices," he said.

The writer is a journalist based in India.