Indian economy endures after its darkest hour

Mumbai: India may not be out of the woods yet, but global investors are trekking back to the country, seeing value in stocks trading at multi-year lows and a glimmer of hope for a recovery in factory output.

A spate of government-inspired moves to attract investment such as allowing full ownership by single-brand foreign retail chains and steeply increasing the interest rates on non-resident Indian deposits have bolstered investor confidence and helped the rupee to strengthen.

And falling food prices should cool headline inflation and set the ground for the Reserve Bank of India (RBI) to ease its tight-fisted monetary policy as soon as January 24 when it is scheduled to meet.

"The darkest hour is just before the dawn," equity trader Kevin D'Souza said. "There are big bumps ahead, but the worst is hopefully behind us."

Notching gains

Both the top-30 Sensex and the rupee, which had plunged a quarter and 16 per cent respectively in 2011, have recouped some losses and look good to notch more gains.

Production at factories, mines and utilities in Nov-ember jumped 5.9 per cent, the most in five months, after contracting 4.7 per cent the month before. The data has been volatile, but the rebound has boosted the prospects for companies.

Manufacturing output, which makes up 76 per cent of industrial production, climbed 6.6 per cent, the government said last week. While output of consumer goods rose 13.1 per cent and electricity 14.6 per cent, the contraction in capital goods eased to 4.6 per cent from 26.5 per cent in October.

The Sensex has gained 4.5 per cent since the end of 2011 to 16,154.62, its highest weekly close in five weeks, and the rupee has strengthened about three per cent to 51.5350 against the dollar.

Capital inflow

Data from the Securities and Exchange Board of India showed foreign funds pumped around $500 million (Dh1.836 billion) into stocks and $2.2 billion into debt instruments over the past two weeks.

There could be some hiccups if quarterly earnings disappoint. Infosys, which thrives on outsourcing contracts from the United States and Europe, last week tempered its revenue outlook in dollar terms, citing headwinds from the debt-ridden Eurozone.

Its rivals Tata Consultancy Services and Wipro will report their results this week, as also energy giant Reliance Industries and HDFC Bank.

Negatives factored in

JPMorgan said it was optimistic about Indian shares in 2012 as a large part of the negatives were already factored into current earnings estimates and valuations, while there were signs of a turnaround in the policy environment. "A sensitivity analysis of Sensex levels versus earnings growth and valuation levels suggests limited downside and potential returns of 15-20 per cent over the next year," the US investment bank said in a note.

Focus will be on the Dec-ember wholesale-price inflation due on Monday, with many economists forecasting the rise in prices to drop below eight per cent after hovering above nine per cent for a year. The optimism stems from a contraction in food prices in the last two weeks of the month.

"It's quite a possibility that CRR might have to be cut by 50 basis points … but we'll have to wait for the Monday inflation numbers to take a final call," Manish Wadhawan, director and head of interest rates at HSBC, told ET Now television channel.

The CRR, or cash reserve ratio, is the amount of deposits that commercial banks must keep with the RBI. It now stands at six per cent and a reduction will give banks more cash to give higher-yielding loans to their customers.

Banks are facing a severe shortfall in funds. "The RBI deputy governor has been stating time and again that CRR cut would lead to some kind of a policy stance change," Wadhawan said.

The writer is a journalist based in India.