Investors in Indian shares will have to brace for increased volatility, wracked by rising oil prices, forecasts for a below-par monsoon, slower-than-expected economic recovery and an ill-advised government move to tax profits earned years earlier by foreign portfolio investors.
Global oil prices, which have rebounded more than 50 per cent since hitting a six-year low in January, pose the biggest challenge to New Delhi that imports about 80 per cent of the crude the country consumes. A weakening rupee has compounded the problem, and is set to deliver a blow to inflation.
Retail and wholesale price inflation for April, due in the coming week, are expected to be benign but this is unlikely to provide succour to the central bank. Fuel prices were raised sharply effective May 1 and food costs are also on the rise after bad weather damaged crops across much of the countryside.
For companies fighting sluggish sales growth, the outlook is muddied by slowing income growth in rural regions, a key market for most factory-produced goods — from soaps and toiletries to motorcycles and cars. There are no easy solutions to the quagmire and efforts by New Delhi to push ahead with its “make in India” campaign are stymied by political opposition to land and labour reforms.
If all these aggravating factors were not enough Prime Minister Narendra Modi’s administration, which rode to power last May on the plank of tearing down barriers and helping businesses create jobs, shot itself in the foot by demanding back-taxes on foreign funds.
Damocles’ sword
The claim smacked of “tax terrorism” that Modi had promised to end during his successful election campaign. Instead, Finance Minister Arun Jaitley initially abdicated responsibility and suggested it was up to the funds to challenge the validity in the courts. It reflected indecisiveness, and the markets responded swiftly — plunging to their lowest level in six months.
Foreign investors pulled out $494 million (Dh1.8 billion) from government and corporate bonds on Wednesday, the biggest one-day withdrawal since January 2014, and took the total outflow to $938 million for the week. Although a global rout for bonds also played a part, it was compounded by the government tax demand.
“One wouldn’t want it to come to a point where investing in India becomes unviable,” Hugh Young, Asia managing director for Aberdeen Asset Management in Singapore, told Reuters. The tax demand, he said, “will make people think twice, at least investors who don’t know India as well as we do.”
Aberdeen, one of the recipients of the tax notice, has challenged the claim in court.
After overseas portfolio investors dumped shares worth $2 billion over 14 sessions, the government woke up on Thursday and announced a panel to find a resolution to the minimum alternate tax (MAT) dispute. To mollify the funds, Jaitley told parliament the government was committed to three principles — certainty of taxation, avoidance of retroactive taxation and enabling both domestic and foreign investment.
“We will ensure that these principles are adhered to in letter and spirit,” he said.
The announcement calmed jangled nerves and investors trooped back, helping shares to claw back. The top-30 Sensex climbed 1.9 per cent on Friday to 27,105.39, and notched a gain of 0.3 per cent for the week, its first weekly rise in four. The 50-share Nifty rose 1.7 per cent to 8,191.50, up 0.1 per cent on the week.
Export stocks, telcos
When trading resumes on Monday, strong US jobs data and a weakened rupee should underpin shares in export-driven companies. Software services firms Tata Consultancy Services, Infosys Ltd, Wipro, HCL Technologies and Tech Mahindra earn a large part of their revenue from overseas, particularly from America.
A stronger US economy should also help makers of generic drugs such as Sun Pharmaceuticals, Dr Reddy’s and Cipla as well as auto-parts producers like Bharat Forge that feed overseas companies.
Telecom companies Bharti Airtel and Idea Cellular have been in the limelight after a telecom spectrum auction by the government in March. Beaten down for many years due to aggressive tariff wars, the sector is now gaining strength and the airwaves bought for a period of 20 years are seen as driving earnings in the world’s second-largest mobile market.
“In this desert of no earnings growth, telecom companies are the only ones whose profits are growing,” Anand Shah, the chief investment officer at BNP Paribas Asset Management India, told Bloomberg. “We’ve just scratched the surface as far as data is concerned.”
Rising demand for smartphones is also drawing foreign companies to India. Japanese telecoms company Softbank Corp and China’s e-commerce giant Alibaba Group Holding are in talks to buy up to 20 per cent stake in Micromax Informatics, which owns India’s second-largest smartphone brand. The stake could be worth as much as $1.2 billion.
Record reserves
The sell-off by foreign funds sent the rupee tumbling to its lowest level since September 2013, to nearly 64.25 against the dollar before pulling back to about 63.94 on Friday, paring the loss to 0.8 per cent for the week. The dollar, which has strengthened against most currencies, is likely to climb more when the Federal Reserve raises interest rates. In anticipation of this event, the Indian central bank has been building a war-chest by buying dollars from the market.
This has boosted India’s foreign exchange reserves. According to the latest data, the reserves stood at a record $351.87 billion on May 1, up $7.26 billion from a week earlier.
Most of the increase came from foreign currency assets that rose $6.9 billion over the week, and dealers said this could be due partly to revaluation.
The reserves have climbed by $32.6 billion since January 2, thanks to robust inflows from foreign funds, FDIs and deposits by Indian expatriates, mainly from the Gulf. DSP Merrill Lynch analysts said last month the central bank was likely to buy $62.5 billion in the next 12 months, partly to keep the Indian currency competitive for exporters.
The writer is a journalist based in India.
