Indian investors expect another pre-poll financial stimulus package

Mumbai: The writing on the wall for stock investors in India is: Brace for choppy markets as the focus shifts to an interim budget in the coming weeks and probable national elections in April-May.

The government is widely expected to pursue another economic stimulus package for the slowing economy, including rate cuts to help revive consumer spending.

The measures will have to come before the elections are formally announced which triggers a code of conduct that bars any government giveaways which can be seen as influencing voters.

Last week's cut in petrol, diesel and cooking gas prices by about 11 per cent - the second government reduction in almost two months - was an indication in this direction. The move should push annual inflation towards three per cent from around 5.6 per cent in early January and prepare the ground for lower interest rates.

"The talk on the street is rates will be slashed by 100 to 150 basis points by March," said equity trader Rasesh Shah. "The government will also put pressure on banks to pass on the benefit to consumers."

The banking sector in India is dominated by state-controlled banks but they have been resisting pressure to lower rates, without a reduction in deposit rates offered by government savings schemes that compete for public deposits. Banks have also been reluctant to give loans because of rising consumer defaults in the slowing economy that has hurt incomes and jobs.

Equity strategist V. Venugopal said the outlook for the stock market depended on how quickly borrowing costs could be brought down and banks become comfortable to step up loans. For corporate earnings to pick up, you need to throttle up spending," he said. "This is not happening because the global credit crisis has left trust in tatters."

Although tightly regulated banks in India have escaped the collapse of those in the US and Europe, the world financial turmoil has dented confidence. Banks have increasingly parked funds in safe-haven government securities than risky loans.

Venugopal said India had limited options to restore confidence until world problems were fixed, citing the IMF. "Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy," the IMF said last week in a report released in Washington.

"A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets unclogged."

- Geetha Baskharan is a journalist based in India.