India’s benchmark stock indices posted their biggest weekly losses in six years, flattened by troublesome debts in the banking sector and rising risk-averse global investors, and the near-term outlook looks grim with more falls expected in the coming week. The overwhelmingly bearish mood, however, should be used as an opportunity by investors with a longer horizon to acquire stocks.

After the market closed on Friday, the government said industrial output contracted for the second straight month in December, falling a more than expected 1.3 per cent compared with a 3.2 per cent drop in November, while retail inflation in January accelerated at the fastest pace in 17 months on higher food costs, particularly pulses.

The data should pile further pressure on stock prices because there is little leeway for policymakers such as the Reserve Bank of India (RBI) to lower interest rates and provide an impetus to the manufacturing sector. Capital goods output, a proxy for investments, plunged a fifth in December, while consumer goods production grew 2.8 per cent. The consumer price index (CPI) climbed 5.69 per cent in January, propelled by food prices that rose 6.85 per cent.

“CPI data for January confirm that the Reserve Bank was successful in meeting its near-term inflation target but also highlight the difficult task the RBI faces in achieving its medium-term targets,” Mark Williams, chief Asia economist at London-based Capital Economics, said in a report. “We expect the repo rate to remain on hold at 6.75 per cent throughout 2016.”

Don’t wait for bottom

Equity salesman Anmol Bhushan said the data would provide more ammunition to the bears, but added that he was advising his clients to look for bargains because the economic outlook was better than being projected.

“When everyone is selling and the environment is clouded by too much of pessimism, it’s a good time to be sensible,” he said. “I am telling my clients to invest a third of their cash right now, and if prices go down further to pick up more. Never wait for a turnaround to happen, you’ll miss the bus.”

Bank of America-Merrill Lynch also thought likewise, a day after the top-30 Sensex slipped below 23,000.

“While it is most likely impossible to catch the bottom, we believe the ongoing correction provides a good opportunity to add equity in India,” it said in a note to its clients.

There is much anticipation about the upcoming annual federal budget, scheduled to be unveiled on February 29, but cash-strapped New Delhi will have to bail out a restive rural heartland that is reeling under poor monsoon rains and lower farmer output leaving little room to provide any substantial heft to the struggling manufacturing sector.

“In our view, the budget for 2016 is unlikely to be a meaningful catalyst for the markets,” the US investment bank said.

However, because expectations are muted, any positive surprises in the budget could trigger a rebound, Bhushan said.

Foreign selling

The widely tracked Sensex shed 6.6 per cent over the five days to Friday and the broader 50-share Nifty fell 6.8 per cent, posting their biggest weekly drop since July 2009, as withdrawals by foreign funds reached $2.1 billion (Dh7.7 billion) since the start of January.

Emerging market funds are facing heavy redemption pressures from investors because of the global turmoil, primarily caused by China’s economic slowdown and the world commodity prices collapse. As India is overweight in many fund portfolios, the selling is expected to continue for some time to make up for shortfalls elsewhere.

The Sensex slumped to 22,600.39 on Thursday, its lowest in 21 months, before nudging up to close at 22,986.12 on Friday. Similarly, the Nifty closed at 6,980.95 after hitting 6,959.95, its lowest since May 2014. Both the indices are down more than a fifth from their highs in January 2015, indicating a bear market.

The pull-out by foreign funds also weighed on the rupee, which could test its all-time low in the coming week. The currency weakened as far as 68.4725 against the dollar, within a hair’s breadth of 68.845 record low in August 2013, before closing at 68.2350, down 0.9 per cent on the week.

Still, for all the negative news hogging the headlines, India’s $2 trillion economy remain on track to post the world’s fastest growth rate — 7.6 per cent in the current financial year to end-March, and this should underpin the market in the longer run.

“We’re talking of growing at 7-8 per cent while the world is talking of deflation,” Madhusudan Kela, chief investment strategist at Reliance Capital Ltd, told Bloomberg TV. “What’s happening globally will affect us in the short term. That’s volatility, not risk. India remains a bright spot.”

Distress in banks

One of the primary factors behind the slump in shares prices over the past week was the poor quarterly results from banks.

State Bank of India, the country’s leading commercial lender, said its October-December profit fell 62 per cent to Rs11.15 billion compared with the same period a year earlier, its biggest quarterly drop in nearly five years as bad loan provisions ballooned after a central bank directive to clean up books in the sector.

Bad loan provisions of SBI almost doubled to Rs76.45 billion and bank head Arundhati Bhattacharya said “around half” of the troubled loans were accounted and the remaining would be taken up in the March quarter.

“Most of the pain ... will be taken to the extent possible within the (current) year,” she told a news conference. “But yes, there might be something residual in the coming financial year as well.”

Many state-controlled banks posted losses in the December quarter, with IDBI Bank topping the list with Rs21.84 billion, followed by Bank of India with Rs15.06 billion and Indian Overseas Bank at Rs14.25 billion.

“While profitability of some banks may be impaired in the short run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way,” RBI Governor Raghuram Rajan told a bankers’ conference.

Wild claims made by financial analysts about the size of the problem verge on “scaremongering” he said. “The market turmoil will pass. The clean-up will get done and Indian banks will be restored to health.”

The writer is a journalist based in India.