India’s central bank holds the trump card that will determine the near-term outlook for the stock market, as leading companies across core sectors struggle with earnings slowdown, drop in consumer spending and less than optimum use of manufacturing capacities.
There is a consensus among economists, corporate honchos and the investing classes for a rate cut when the Reserve Bank of India meets on Tuesday to review policy. Mandarins in New Delhi, including Finance Minister Arun Jaitley and Chief Economic Adviser Arvind Subramanian, have thrown their weight behind calls for lowering borrowing costs to help bolster investment and create jobs.
With expectations high for a 25 basis points rate reduction — it would be the third this year if done after two quarter point cuts since January 15 — shares pulled back from a slide this week, but the undercurrent is shaky. Support lines are vulnerable to break down because of weak growth signs on the ground.
The top-30 Sensex closed at 27,828.44, up 3 per cent in May but down 0.5 per cent on the week. The widely tracked benchmark, which dropped in April, is 7.3 per cent off a record high of 30,024.74 struck in early March.
The broader 50-share Nifty shed 0.3 per cent this week to 8,433.65, but rose 3.1 per cent in May. It has, however, lost 7.5 per cent since hitting an all-time high of 9,119.20 in March.
“A 25-basis point cut is the consensus view, and any rate cut higher than that will be positive for the market,” Prabhat Awasthi, head of equity research at Nomura, told Bloomberg TV.
Earnings woes
Top companies such as Tata Motors, Oil and Natural Gas Corp, Hindalco, and Mahindra & Mahindra, Bank of Baroda and Punjab National Bank reported sharp falls in quarterly earnings, underscoring tough market conditions both within and in overseas markets such as China.
Tata Steel reported a consolidated net loss as its European operations faced headwinds, while Sun Pharmaceutical, India’s biggest drug maker by sales, saw its March quarter profit slump to Rs8.88 billion from Rs15.87 billion in the same period a year earlier as it battled with the costs to acquire rival Ranbaxy and regulatory constraints on exports to the US.
For banks, the problem is compounded by sticky loans, the product of an economic slump during the last two years of the previous administration that was voted out in May last year.
Lower rates could ease the pain and help businesses to recover, create jobs, revive consumer spending and enable companies to use idling capacity or revive investing. New Delhi has been pushing hard to jump-start stalled projects, but new investment is slow to come by as business confidence is still edgy.
“The broad consensus was that the only lever that the government had in the near term to kick-start growth was to revive the investment cycle by easing supply-side bottlenecks and facilitating clearances to stalled investment projects,” Tanvee Gupta Jain and Macquarie Capital Securities India, said in a report.
“At the same time, it has been taking steps towards increasing infrastructure spending, especially in sectors like roads and railways. Overall, the general view was that the economy is on the right track, but any pickup in growth will only be gradual.”
She expects the RBI to cut rates by a total of 50 basis points by end-March 2016, including one on Tuesday. “However,” she noted, “increasing upside risks to inflation has raised the odds of rates being kept on hold in the June policy.”
Weather imbroglio
Data released after the market closed on Friday showed India’s GDP grew 7.5 per cent in the March quarter — and 7.3 per cent in the full financial year 2014-15, but the figures were at variance with ground realities. Economists and others, including the central bank, have been circumspect the swallow the numbers.
And, the New Delhi-based Central Statistics Office sharply revised growth down to 6.6 per cent for the December quarter from its preliminary data of 7.5 per cent. Figures have been awry after the office began using a new method that measures economic activity by market prices, taking into account gross value addition in goods and services as well as indirect taxes.
The biggest immediate worry for New Delhi is the climatic changes underway that could wrack agriculture output. A heatwave has killed more than 500 people across India and if the June-September annual monsoon fails to deliver timely rains, it could push up food prices and severely dent rural incomes.
“A very active typhoon season, combined with drought in much of India, could have a significant impact on lives and property for more than a billion people in Asia during the summer of 2015,” Alex Sosnowski, senior meteorologist at US-based AccuWeather, said in his Asia summer forecast.
The India Meteorological Department had earlier said the southwest monsoon would be below average. The annual rains, which usually hit the Kerala coast on June 1 and progresses northwards to cover the whole country by July, provide the main source of irrigation to farms.
Global warming phenomenon called El Nino has already triggered higher surface temperature in the tropical Pacific Ocean and caused typhoons. This could affect the weather pattern in the Indian Ocean.
For companies that depend upon rural demand, particularly consumer goods makers such as Hindustan Lever, motorcycle producer Hero MotoCorp and tractor maker Mahindra & Mahindra, it would be an uphill task.
Money trail
Meanwhile, foreign direct investment in India soared to a record $34.9 billion in 2014-15, signalling a revival in business confidence among multinationals following the change in government in New Delhi. The inflow, which was up from $21.6 billion in the year before, mainly went into telecom, oil & gas and mining sectors, wholesale trading and IT services.
The automobile sector also drew in foreign investments, but there was hardly any flow into any other manufacturing, indicating the “make in India” campaign would need more hard sell to get it off the ground.
“We expect FDI inflows to pick up further in 2015-16, driven by an improving domestic growth outlook, recent liberalisation of FDI limits and government efforts to improve the ease of doing business,” Nomura analysts Sonal Varma, Aman Mohunta and Neha Saraf said in a report.
The author is a journalist based in India.
