Surprise rally on Sensex likely to be short-lived

Mumbai: Indian shares pulled off a surprising rally last week, but this could be short-lived as high inflation and record oil prices begin to bite. The focus this week will be on the central bank, which on Tuesday may again tighten money supply or raise interest rates.

Bank of America and Development Bank of Singapore said last week they expected the Reserve Bank of India (RBI) to raise its main short-term lending rate, the repo rate, by a quarter point to eight per cent.

"The higher repo rate will send a clear signal on RBI's resolve on maintaining price stability and for banks to raise lending rates," Bank of America strategist Han-Sia Yeo said in a report.

Inflation on April 12 came in at 7.33 per cent, data showed yesterday, above 7.14 per cent a week earlier and climbing closer to its highest in more than three years. With global oil prices hitting $119 a barrel, there is little chance for an easing in the prices of commodities such as food and metals.

"Should oil prices remain above $100 per barrel, inflation could surpass nine per cent in the third quarter of 2008 and average over 7.5 per cent in 2008-09," Ramya Suryanarayanan, economist at Development Bank of Singapore said.

"Against this backdrop, and given the apparent political will to tackle inflation, we have brought forward our forecast for two 25 basis point rate hikes in the repo and reverse repo by a quarter. We now expect the first rate hike to come at next week's policy meeting," she wrote in a report on India.

The reverse repo is the rate at which the RBI borrows from banks. It is currently at six per cent.

Traders said even if the RBI, which had already raised the level of deposits that banks must hold in reserve to a seven-year high of eight per cent, does not tighten policy it was unlikely to sustain the stocks rally.

Mixed bag

"Earnings results have been a mixed bag and the outlook is clearly troubling," said trader Rasesh Shah. "Fundamental factors like high inflation and interest rates, sluggish demand and a slowing economy are big concerns."

Swiss bank UBS cut its year-end target for the top-30 Sensex to 19,600 from its earlier forecast of 22,600, citing two factors: "In the near term, we believe two key concerns - that of inflation and interest rates staying high, and political uncertainty are likely to persist. At our target, the market would be trading at one-year forward PE of 16 times, compared to the current PE of 16.6 times."

Still, the Sensex climbed 3.9 per cent last week to 17,125.98, registering its third weekly rise in a row and posting its best close since February. It is, however, down 15.6 per cent this year.

Mobile operator Bharti Airtel was a star performer after it posted a 37 per cent jump in quarterly profit, beating forecasts, and said it expected to continue signing up new users at a rapid pace.

Indian companies added a record 10.16 million wireless subscribers in March, taking the total to 261.1 million and propelling India past the US, which has 257.9 million, to become the second-largest mobile market after China.

Maruti Suzuki India said quarterly profit fell by a third after it adopted a new depreciation method, surprising analysts. But it notched a milestone selling a record 711,000 cars in 2007-08 - exceeding the 673,000 cars its parent, Suzuki Motor, sold in Japan.

Analysts said India's $1trillion economy, Asia's third-largest after Japan and China, would grow a slower pace this year but the expansion would still be robust.

Crisil last week cut its forecast for India's growth to 8.1 per cent in 2008-09 from its earlier projection of 8.5 per cent, saying rising inflation and interest rates and a worsening global growth outlook would take a toll.

- The writer is a journalist based in India.