Sensex set to consolidate gains

Shares in India are set to consolidate after rallying for four of the past five weeks, but rising confidence among foreign investors in the country's rapid pace of economic growth should provide rearguard support.

The focus this week will be on the quarterly earnings of some of the leading Indian companies. While Tata Motors, the maker of trucks, buses, utility vehicles and cars, from the premium Jaguar and Land Rover brands made in the UK to the Nano, the world's cheapest car, is expected to report a strong profit for the period from April to June, from a loss in the same period last year; mobile operators Bharti Airtel and Reliance Communications should post lower earnings, due to rock-bottom call tariffs.

Other big firms that release results include Tata Steel, whose Corus unit in the UK provides the bulk of its capacity, and State Bank of India which dominates the country's banking sector. Reliance Capital, Unitech, Tata Power, Suzlon Energy, Cipla, Parsvnath Developers, Bajaj Hindusthan and Bharati Shipyard.

Positive outlook

Brokerage Nomura advised investors to move to a tactical neutral on India even though the 12-month outlook for the country's equities remains positive.

"The recent system-wide squeeze in liquidity and emerging signs of an easing in economic activity leads us to think that we might be heading into a period of market consolidation," analysts led by Prabhat Awasthi wrote in a report to clients. "Profits have come largely in line with our analyst expectations, and we do not expect them to be a meaningful catalyst to drive the market higher."

The top-30 Sensex rose 1.5 per cent last week to 18,143.99, its fourth weekly rise in five, and traders said there was a need to consolidate before building up steam to push ahead.

The rally in share prices has made them less attractive, against a backdrop of weak upgrades in analysts' earnings forecasts, Nomura said.

The brokerage remained bullish on banks and real estate stocks, with State Bank of India and Unitech ranking among its top picks. It removed state-run natural gas distributor Gail India from its leading picks and replaced motorcycle maker Bajaj Auto with utility vehicle and tractor producer Mahindra and Mahindra.

Still, the analysts were positive in relation to Indian stocks over the next 12 months, given the sanguine outlook for the nation's economic growth and a likely peak in inflation.

Monsoon rains

Better-than-forecast monsoon rains in July have boosted the outlook for crops in a nation of more than 1.2 billion people, and helped erase another drought that had dented farm output last year and sent food pricing soaring. The annual June to September rainfall is the main source of water for irrigation in India and the lifeline of the economy.

The India Meteorological Department said the rains in July were 102.5 per cent of the 50-year average, and forecast showers in August and September could be 107 per cent.

Food inflation slowed to a 13-month low of 9.53 per cent in late July, from around 20 per cent a few months ago, and the central bank, which has raised interest rates four times since mid-March, indicated it was satisfied with the measures taken already.

"We think we have done enough to manage inflation and we expect to see the effects of this in the second half of the year, because actions act with a lag," Subir Gokarn, who is in charge of monetary policy at the Reserve Bank of India, said on Friday.

India's economy may expand 9.4 per cent in 2010, the fastest pace since 2007, the International Monetary Fund said in early July.

The Reserve Bank of India has a growth forecast of 8.5 per cent for the fiscal year ending next March.

Attracted by the growth potential, foreign funds have pumped $11.2 billion into Indian shares since the beginning of January, and if the trend is maintained the inflow could top the record $17.5 billion of portfolio investments in 2009.

The writer is a journalist based in India.