Profit hunt could neutralise growth stimulus

Mumbai: Coordinated action by India to bolster a faltering economy should power Dalal Street this week, but there will be resistance as investors prepare for earnings shocks ahead of the quarterly reporting season.

After the markets had shut on Friday, the Reserve Bank of India (RBI) slashed its key short-term interest rates by one percentage point, pushing the repo or lending rate to 5.5 per cent, the lowest in eight-and-a-half years.

In New Delhi, the government immediately followed up by more than doubling the foreign investment limit in corporate bonds to $15 billion (Dh55.17 billion) from $6 billion, removed customs duty exemptions on some metals, eased foreign commercial borrowing rules for companies and said it would inject some Rs200 billion (Dh16.67 billion) into the capital of state-run banks.

The moves followed a slew of data that showed the economy was under tremendous strain, caused largely by the global financial gloom, and after the top-30 share Sensex plunged 52.4 per cent in 2008 in its worst ever performance.

Painful adjustments

"Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply," the RBI said in a statement. "But a period of painful adjustment is inevitable."

Equity strategist V. Venugopal said the rate cuts were anticipated after central bank across the world had loosened policy to fight recession, and would help underpin sentiment.

"You should see a jump when the market opens," he said. "But there will be difficulty to sustain the gains."

He said the concerted moves by the authorities would take time to show results on the ground, especially because of India's poor record of implementation. Quarterly earnings, which would be kicked off by Infosys Technologies on January 13, are widely expected to reveal a deep slowdown.

Tata Motors, the country's largest truck maker and the third biggest producer of cars, said on Friday its total sales fell 47 per cent in December, with commercial vehicles diving 51 per cent.

"A deepening recessionary trend in the economy, coupled with continuing credit squeeze and high interest rates, has further depressed customer sentiments. As a result, automobile purchases are being severely impacted," the company said in a statement. Tata's car sales dropped 31 per cent in December, while a day earlier leading carmaker Maruti Suzuki said its December sales fell 10 per cent.

Venugopal said vehicle makers had cut prices in December after the government had slashed a four per cent central tax, but finance was hard to come by with banks and others unwilling to lend.

The ABN Amro Bank purchasing managers' index, based on a survey of 500 Indian companies, fell to a seasonally adjusted 44.4 in December, dropping for the fourth month to its lowest since the survey began in April 2005 and below November's 45.8.

Releasing the survey, ABN's senior economist Gaurav Kapur said conditions were unlikely to improve in the near future and the benefits from measures taken by authorities would take time to filter through.

Manufacturing sector

"Until such time, the manufacturing sector will have to cope with contracting demand, especially on the exports front and stalling investment activity," he said.

India's economy has been stumbling after expanding at nine per cent or more for the past three years, with economists and government officials expecting growth to slow to around seven per cent in 2008-09, with the outlook for the next financial year seen further dented.

Data on Thursday showed India's exports contracted 9.9 per cent in November from a year earlier, the second fall in a row after a 12.1 per cent drop in October.

The overall balance of payments fell into a deficit in the July-September period and stood at a quarterly record of $4.73 billion, compared with a revised surplus of $29.24 billion in the year-ago quarter.

The RBI also reduced its reverse repo rate, at which it borrows surplus cash from banks, by 100 basis points to four per cent, also effective from Friday.

It also lowered the cash reserve ratio, the level of deposits that commercial banks must keep with the RBI, by 50 basis points to five per cent from January 17, a move that would release Rs200 billion.

"We should expect, from all the global projections, that the next year is going to be a very difficult year for the global economy," Montek Singh Ahluwalia, deputy chairman of the Planning Commission, told reporters in New Delhi.

"We have to keep in mind the need for contra-cyclical fiscal policy and monetary policy will continue into the next financial year also," he said.

The Sensex, which gained 6.7 per cent last week to 9,958.22, will climb past 10,000 but it will face resistance at around 10,500, chartist Kanu Dave said.

- The writer is a journalist based in India.