Sensex may slide below 15,000

Mumbai: Equity investors in India will have to brace for more turbulence as a lame-duck government gropes in the dark to stem the slide in growth, while swelling trade and current account deficits mount tremendous pressure on the rupee.

India's $1.3 trillion (Dh4.78 trillion) economy has been slowing for many months, the result of a tight-fisted monetary policy to tame inflation. After 13 interest rate increases, the central bank cut rates in April for the first time in three years to help revive growth, but this will take time to percolate down.

Industrial output in March slumped 3.5 per cent, data on Friday showed, surprising economists who expected a modest rise. The contraction was the second since October when production shrank 5 per cent.

Pointing to a deep problem, capital goods production — an indicator of investment in the economy — plummeted 21.3 per cent in March from a year earlier, the government figures showed.

"Business confidence has taken a heavy knock," said equity salesman Anmol Bhushan. "Projects are held up for years for want of government approvals, while budget proposals on tax changes have added to the uncertainty."

The top-30 Sensex, which fell the most since mid-December last week, shedding 3.2 per cent to 16,292.98, could slide to below 15,000 in the near term, he said.

"The trend is overwhelmingly bearish," Bhushan said. "The depreciating rupee has added to the downtrend in stocks."

No sign of recovery

Even after the Reserve Bank of India (RBI) took a series of measures such as ordering exporters to cash in half their holding in foreign exchange accounts and raising interest rates on non-resident deposits, the rupee showed no sign of recovering.

The currency ended at 53.64 to the dollar on Friday, and is only a matter of time for it to breach the record low of 54.30 hit last December. The rupee has slumped 17.8 per cent since last August, making it one of the worst emerging market currencies.

Clearly, big business is losing patience with the long bureaucratic delays that has been holding up large projects across the country.

"Decision-making is too slow in India," ArcelorMittal Chairman L.N. Mittal, whose steel project in India worth billions of dollars is yet to get approvals even after many years, told The Times of India. "India needs to move the way the rest of the world is moving to be competitive," he said.

Fred Gibson, associate economist at Moody's Analytics, expects industrial production to remain weak in the first half of the year.

"The slowdown in investment activity will be particularly telling on manufacturers as demand for construction related materials declines," he said in a report.

The RBI could provide a glimmer of hope to manufacturers as it starts to shift rates into accommodative territory, but inflation remains a sticking point.

"With inflation refusing to recede, RBI will be reluctant to slash rates quickly any time soon," he said.

Inflation for April is due tomorrow and economists are expecting the annual rise in prices at around 6.7 per cent, slightly off 6.89 per cent in March.

The writer is a journalist based in India.