Sensex braces for a bumpy road

Mumbai:  Dalal Street, where Asia's oldest stock exchange is located in Mumbai, will be in a festive mood this week, but the celebrations could prove to be short-lived if early signs of a slowdown persist.

Expectations the top-30 Sensex would breach the 21,206.77 record high set on January 10, 2008 before Diwali on Friday have now faded, though the possibility remains on the cards by the end of December.

"We're at the crossroads," said equity trader Anmol Bhushan. "The quarterly earnings numbers were generally good, but not spectacular. And, share valuations are pretty expensive."

Diwali is the festival of lights and it also marks the New Year for the trading community. It is also the time when consumer spending is the highest in many parts of India, due in part to the annual bonuses that companies and governments pay their workers.

However, there are some ominous dark clouds on the horizon.

India's infrastructure sector output, which contributes more than quarter of factory production, grew a measly 2.5 per cent annual rate in September, slower than an upwardly revised 3.9 per cent in August. Key components such as coal and petroleum products output fell sharply.

In comparison, the sector index had risen 4.5 per cent in the year ago period, and is up four per cent in the first half of this financial year.

The data comes just ahead of the Reserve Bank of India's (RBI) quarterly policy meeting on Tuesday, when most economists believe the central bank would raise interest rates for the sixth time in 2010.

The RBI has already hiked rates by 125 basis points since mid-March and annual inflation has cooled from double-digits, but another quarter-point increase is on the cards as the 8.62 per cent rise in the wholesale price index in September is way above the central bank's comfort level of 5-6 per cent.

Not rosy numbers

"The September numbers rub the fact in that our industrial core is cooling," the Hindustan Times wrote in an editorial yesterday.

"It will be difficult for India to notch up manufacturing growth rates in excess of 15 per cent the international investor has come to expect."

Industrial output growth had slumped to 5.6 per cent in August from 15.2 per cent in July, and is set to trend lower in coming months as the statistical low-base comparison for the year earlier begins to vanish. The widely followed Sensex eased 0.2 per cent in October, its first monthly drop since May, to 20,032.34. In September, the benchmark had jumped 11.7 per cent, registering the best performance in 16 months.

Bhushan said the market was consolidating and the potential for more gains was strong, given the amount of global liquidity chasing better returns. However, the possibility of profit-taking was also strong as fund managers would be itching to earn their bonuses before the year ends.

Foreigners have poured about $25 (Dh91.75) billion into Indian shares this year, their most on record. Keenly watched this week would be the US Federal Reserve meeting on Tuesday and Wednesday which is expected to announce a second round of quantitative easing to keep the recession wolf away from the door.

On the anvil, according to the market, is an asset purchase programme probably involving half a trillion dollars. This would further boost the fund flows into emerging markets, such as India, and provide a further impetus to the stocks rally.

For investors, the good news this week would be the listing of Coal India, which had raised about $3.5 billion in the country's largest-ever IPO. The world's largest coal miner will make its stock market debut on Thursday, and is expected to find a place among the top 10 companies.

The writer is a journalist based in India.