Renewed concerns the Federal Reserve is tilting towards increasing US interest rates have the potential to halt a surge in Indian shares, as the move could slow down the flood of capital inflows that are vital to sustain the rally.
Foreign investors have moved more than $1.2 billion (Dh4.4 billion) into Indian markets this month, chasing better returns amid excessive global liquidity and sluggish growth in major economies. Uncertainties triggered by Britain’s exit from the European Union have added to the gloom, forcing many central banks to lower interest rates and pump cash into their economies to limit the damage.
The US, which raised rates last December for the first time in nearly a decade, has since cooled off, preferring to await more signs of steadier growth. That wait seems to be ending.
“The US economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability,” Janet Yellen, chief of the Federal Reserve, said on Friday at a three-day meeting of central bankers and academics in Jackson Hole, Wyoming.
It was a signal that a rate increase would be on the table, probably quicker than many people anticipate. To drive home the point, she added: “In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”
And, to calm any panic in global markets, Yellen said that the Fed still thinks future rate increases should be “gradual”.
The Federal Reserve’s rate-setting panel is scheduled to meet in September, November and December, and economists say the odds are rising for an increase in next month.
Investors in India were jittery ahead of Yellen’s speech, and there could be more jitters in the coming week. The top-30 Sensex, which is widely tracked by foreign funds, fell 1 per cent over the week to 27,782.25, while the broader 50-share Nifty shed 0.9 per cent to 8,572.55.
Brexit fallouts
The economic upheaval caused by Britain’s decision to walk out of the European Union is causing heartburn to some Indian companies.
Tata Motors, which owns the marquee Jaguar and Land Rover brands, said on Friday its net profit for the June quarter more than halved from a year earlier as it suffered forex losses of Rs22.96 billion, largely caused by the severe beating the pound took in the aftermath of Brexit and adverse commodity derivatives impact of Rs1.67 billion.
“We need to be careful,” said Chief Financial Officer C Ramakrishnan, “that’s why we have a fairly robust hedge book so we are not subject to so much volatility.”
The company is India’s leading maker of trucks and buses and the country’s top automobile producer by revenue. It also makes utility vehicles, sedans, hatchbacks and the “Nano”, the world’s cheapest car. The UK-based JLR was the icing on the cake for the iconic company.
Profit after tax at JLR fell to £304 million from £492 million in the same period a year ago, even as revenue rose 9 per cent, mainly due to forex losses.
“The operating performance in the quarter reflects the overall higher wholesales, offset by adverse foreign exchange impact of £207 million including revaluation of £84 million, mainly euro payables resulting from depreciation in the pound following the Brexit vote,” Tata said in a statement.
Brexit is also taking a toll on export-driven software services companies. Infosys Ltd, the No 2 IT firm in India, recently lost a large contract from Royal Bank of Scotland (RBS) after the bank shelved a planned spin-off.
“We are seeing softness in some clients post Brexit which was not anticipated in the beginning of the quarter,” Chief Executive Vishal Sikka told an investor meet on Friday. “We want to see if RBS is a one-off case or there are more like RBS.”
The company, which gets more than 80 per cent of its revenue from exports, has seen improvements in large deal wins elsewhere, he added.
L&T, Welspun
Larsen & Toubro, the country’s biggest engineering and construction conglomerate, aims to more than double its annual revenue to Rs2 trillion by 2021, Chairman A.N. Naik said. The company plans to expand its presence in the Gulf, Africa and South East Asia, he said.
“We believe that the economic conditions are now starting to turn in favour of our company. Combined with the right strategy and on-ground execution, our target, though ambitious, is achievable,” Naik told shareholders at the company’s annual general meeting.
New Delhi’s move to open the defence sector to private-sector participation would lead to business opportunities worth Rs13 trillion over the next 10 years. Similarly, the estimated opportunity in nuclear power over the same period is seen at Rs500 billion, while in infrastructure more than 1,000 projects worth about Rs14 trillion are in the pipeline, he said.
“Your company has both the expertise and the track record to make the most of each of these opportunities,” he said.
Shares in Welspun India, a textiles maker and prominent supplier to global retail chains, lost more than half their market value over the week after a key client severed ties citing quality concerns.
Target Corp, the second-largest discount retailer in the US after Wal-Mart, said it was terminating business with Welspun for passing off cheap sheets as premium Egyptian cotton. Target had accounted for about $90 million, or 10 per cent of the company’s total business in the financial year through March, according to Welspun.
Wal-Mart, Welspun’s third-biggest customer, is also reviewing the company’s cotton certification records, the Wall Street Journal reported.
Welspun India shares closed at Rs49.40 on Friday, down 52.1 per cent over the week.
The writer is a journalist based in India.