Sensex likely to remain choppy

Mumbai: After last week's roller-coaster ride investors in Indian shares should breathe easier, but trading will continue to be choppy as conflicting US economic data keep world markets on tenterhook.

Although Indian shares have outperformed other markets in Asia, a trend it has maintained for many months, there is an increasing worry about the outlook. Losses suffered by millions of shareholders in Reliance Power, which raised a record $3 billion in an IPO in January have jolted investor confidence.

"The market is very indecisive," said equity trader Kevin D'Souza. "Too many people have burnt their fingers. Even big funds are on wait-and-watch mode."

US data that showed an unexpected rise in retail sales, only to be followed by fresh indications of recession in the world's largest economy and a worsening global credit crisis, have added to the uncertainty, he said.

One day at a time

"You have to take one day at a time, which is not very good for markets," he said.

Reliance Power shares, which made their market debut last week, tumbled to Rs333 before pulling back to close at Rs384.70, down 14.5 per cent from the IPO price of Rs450.

The IPO was subscribed more than 70 times and was quoted in the unofficial grey market at as high as Rs1,000 before a global equities rout soured sentiment. "It will take a long time to get over the bad taste left by Reliance Power," D'Souza said.

Still, the Sensex pulled out of a nosedive to end last week up 3.7 per cent - its first rise in five weeks - at 18,115.25 after heading towards 16,500 at one stage.

There are signs that Indian consumer goods and auto makers are facing pressure from higher interest rates, which have slowed demand and crimped spending.

Last week, the government said December industrial output rose 7.6 per cent from a year earlier. Although this was better than a downwardly revised 5.1 per cent growth in November, it was sharply lower than 12.4 per cent in April, the start of the financial year.

"Industrial activity has cooled and, in our view, will continue doing so as the lagged effects of the interest rate tightening and currency appreciation bite, while weaker domestic growth in the developed world and higher oil prices also take their toll," economist Robert Prior-Wandesforde at HSBC said in a note.

"So far the industrial slowdown has been confined largely to the consumer side, where durables production has been particularly weak, while capital goods have remained extremely resilient," he said.

Ideally, this should warrant an interest rate cut by the Reserve Bank of India (RBI) that has kept the main short-term lending rate at a five-year high of 7.75 per cent since March last year after raising it five times from June 2006.

But last week the government raised prices of petrol and diesel for the first time in 20 months, a move that could accelerate inflation that is now running at above four per cent. With commodities prices hitting record highs globally, the RBI is unlikely to lower rates in the near term.

As the US Federal Reserve is likely to cut rates again in March, if not earlier, this could further widen the 4.75 per cent differential between US and domestic rates and draw more capital flows into higher-yielding assets in India.

"An important policy stance we have adopted to ensure that growth is more inclusive has been to keep inflation under check," Prime Minister Manmohan Singh told a business conference in New Delhi.

Analysts are worried the government, with an eye on national elections due by next year, may arm twist companies to lower prices to contain inflation even if their input costs are rising.

Last week steelmakers that had raised prices by Rs2,000-Rs2,500 a tonne were forced to agree to roll back prices by up to Rs1,000 by Steel Minister Ram Vilas Paswan, who said he had proposed to the finance minister to remove import duty on met coke and scrap iron ore from five per cent. "The government wants steel companies to keep adding capacities despite rising input costs so that India becomes a leading global producer, but we also have to ensure that rising steel prices do not hurt consumers," he said.

- The writer is a journalist based in India.