Indian markets likely to suffer more pain

Mumbai: Worsening global economic crisis and rising averseness to risk among investors will pile more pressure on Indian shares this week, when trading is limited to just three days due to holidays.

Uncertainties linked to month-long general elections, which end in mid-May, will also smother any possibility of a pullback in the near term.

"The market has fallen sharply over the past 14 months, but the overwhelming feeling is we are nowhere near to bottoming out," said equity trader Amit Patel. "If the trend seen in the US and Japan are any indication, there will be more pain."

He was referring to the 25-year lows plumbed by Japanese stocks last week and Wall Street that sank to troughs last seen in 1997.

In comparison, the top-30 Sensex twice hit its worst close in over three years last week, finishing down 6.4 per cent on the week despite a mild recovery on Friday to 8,325.82. The index has slumped 60.7 per cent from an all-time peak of 21,207.77 hit on January 10, 2008.

"It could fall towards 7,500 in the near term," Patel said. "But the fear is it may fall more if the global situation worsens."

Investor confidence has been dented by the slump in share prices of global giants like General Electric, Citigroup and General Motors and the lingering possibility of a collapse is driving money managers to cut their exposure to equity markets worldwide, including in India.

Net sales by foreign funds have reached $2.265 billion since the start of 2009, adding to outflows of $13.3 billion last year. The withdrawals are expected to continue in the coming weeks as redemption pressure rises on the funds from their investors overseas.

The pullout sent the rupee down 1.1 per cent last week to 51.7 against the dollar, off a record low of 52.185 struck on Tuesday. Traders expect the currency to slide towards 54 in the coming months, also pressured by dwindling remittances from Indians in the Gulf and elsewhere.

As expected the Reserve Bank of India cut key interest rates by 50 basis points last week, in the latest in a series of measures to support falling growth, but this failed to mollify bruised markets. "The real issue is not with supply. It is the demand which refuses to pick up. Customers and banks continue to be risk averse," brokerage IndiaInfoline said in a note.

Data last week showed the economy remained under tremendous stress, with manufacturing activity contracting for a fourth straight month in February and exports dropped again in January. The ABN Amro Bank purchasing managers' index, based on a survey of 500 companies, rose to a seasonally adjusted 47.0 in February from January's 46.7. A reading below 50 signals economic contraction.

"Essentially we don't think the economy has bottomed out yet," said Nomura economist Sonal Varma, who expects the economy to hit a trough of 4.5 per cent annual growth in the June quarter.

Last month, government figures showed growth in the December quarter slowed to 5.3 per cent from a year earlier in the weakest pace in six years.

Political uncertainties are also a worry. If the main two groups -- the Congress party and the Bharatiya Janata Party fail to win a majority with their respective alliances, a coalition of smaller parties could form an unstable government.

For much of the five-year term of New Delhi's ruling Congress-led coalition, it was thwarted from pushing economic reforms vital for growth by its communist allies. The Bombay and National stock exchanges are closed on Tuesday and Wednesday for domestic holidays.

The writer is a journalist based in India.