Rate cut talk could spur India shares

Mumbai: After rallying a third over six straight weeks Indian shares should face resistance, but a possible cut in interest rates could power the market higher supported also by signs the worst for the world economy may be over

Quarterly earnings will also set the trend for the market with Reliance Industries, Tata Consultancy Services, Wipro, Hero Honda Motors, ACC and ICICI Bank scheduled to release their results this week.

The Reserve Bank of India (RBI) will release its quarterly monetary policy on Tuesday and economists are split on the prospects of a rate reduction to spur growth that has slowed to its weakest in six years.

"Our forecast is for a further 50 basis points cut in the repo, reverse repo and cash reserve ratio [CRR] rates," Robert Prior-Wandesforde, Singapore-based senior economist for Asia at HSBC, said in a note.

India's wholesale price-based inflation, which was at an over 20-year low of 0.18 per cent in early April, could turn negative and reach -2 per cent by mid-year. Consumer prices that are released after a lag should show sharp fall in March, he said.

"While there is tentative evidence of the world economy stabilising the central bank is unlikely to be confident that a strong global/Indian recovery lies ahead," Prior-Wandesforde said.

Barclays Capital said it expected the RBI, which has lowered the repo rate by 400 basis points since October to an all-time low of 5 per cent, would sit tight for the time being.

"We believe monetary conditions are already loose& and money market spreads are already showing signs of dropping," Sailesh Jha, economist at the bank, wrote in a note.

The top-30 share Sensex climbed two per cent last week, swelling the rise over six weeks - the longest run of gains in one and half years - to almost 33 per cent. A revival in buying by foreigners underpinned the rally, with the latest figures showing a net portfolio inflow of $1.5 billion (Dh5.5 billion) since mid-March.

The index raced above 11,000 points for the first time in six months and closed at 11,023.09 - up more than 40 per cent from its 2009 low in early March and triggering concerns the market may have run ahead too far.

Morgan Stanley's London-based chief Asian and emerging market strategist, Jonathan Garner, said on Thursday he was cutting Indian shares to underweight from equal weight because the rally since mid-March had widened the market's price-to-earnings ratio to a 35 per cent premium over the MSCI Emerging Markets Index.

"In the last four elections on average the market has performed well in the run-up to election season but poorly thereafter," he noted, asking clients to book profits. Voting in the world's biggest democracy began on Thursday and the five-phase process will end on May 13 with the results due on May 16. Early signs indicate a fractious mandate is in store - a results that could worsen an economic slowdown and halt the market rally.

Last week, the trade secretary said India's exports probably fell for a sixth straight month in March and was likely to maintain the weak trend till September as recession in developed economies snuff out demand for Indian goods.

"March exports, we have only the provisional estimates... It is just under $12 billion," G.K. Pillai told reporters, adding it would be about 31 per cent below from a year ago. "This negative growth will continue up till September. Then, you will find a positive growth."

The final figures for 2008-09 exports is seen touching a lower revised annual target of $170 billion and may remain flat at that level in 2009-10, he said.

While exports, which make about a fifth of India's gross domestic product, have been contracting since October, imports started falling from January as slowing demand at home cut import of capital goods and lower global crude prices slashed the fuel bill. Pillai said India's imports may have fallen 37 per cent in March.

Rising portfolio inflows and the sharper fall in imports have boosted the rupee, which rose for the sixth week in a row to 49.9 against the dollar on Friday - sharply strengthening from a record low of 52.2 in early March.

- The writer is a journalist based in India.