Central bank rate key to rebound

Mumbai: There is a good chance of Indian shares pulling back after a selloff during much of this month, if the central bank restricts its monetary tightening to an expected quarter-point increase in interest rates at its quarterly policy review on Tuesday.

The Reserve Bank of India (RBI) is under pressure to rein in inflation which is driven by double-digit rises in prices of food, fuel and other commodities. But policymakers in New Delhi want the central bank to temper its policy so that economic growth does not become a casualty.

"A trade-off between growth and inflation should provide a sigh of relief," equity trader Anmol Bhushan said. "Shorts will start to cover their positions but don't expect a big rebound."

The top-30 Sensex gained 0.8 per cent last week to just above 19,000, but is down 7.3 per cent since the close of 2010. The market took a beating after factory output data showed a big slowdown while inflation picked up pace, but investors are now hoping there will not be a half percentage point rate hike as initially feared.

Trade Minister Anand Sharma wrote a letter to the finance minister recently saying the central bank was not the best suited to control prices of food items that were primarily caused by damage to crops and hoarding by unscrupulous traders.

Heavy-handed policies

"The high inflation in primary articles, particularly vegetables, is more on account of supply-side constraints and monetary policy may not be the most suitable intervention to deal with the situation," he said in the letter, which was released to the media.

The missive highlighted the opposition within the government to heavy-handed monetary policy that could derail an economy that is expanding at nearly 9 per cent — a growth that could raise family incomes, standard of living and help garner votes for the ruling coalition in state elections later this year.

"It is pretty certain the RBI will not bring out the sledge-hammer," Bhushan said. "And it should provide some breathing time to steady the ship." He said quarterly results were mostly in line with market expectations or better and this indicated the price earnings multiples were justified in the fast-growing country. Among the big earnings due this week are: ICICI Bank, Dr Reddy's Laboratories, Oil and Natural Gas Corp, Idea Cellular and Sesa Goa.

Although foreign funds withdrew about $900 million (Dh3.31 billion) from the stock market in January, after buying a record $29.3 billion worth of shares in 2010, there has been a net inflow of $2.4 billion into debt instruments such as government bonds and company debentures this month.

"The lure of India as a destination for global investors with a long-term horizon is undiminished," said a fund manager at a foreign asset management firm, who did not want to be named. A stronger US growth could sway some investors but the recovery was still not broad-based, and Europe continues to be haunted by simmering debt woes, he said.

The writer is a journalist based in India