Brightened prospects for lowering borrowing costs in India are set to lift shares, just ahead of the busy season when festival-driven demand usually boosts productivity at companies in the subcontinent. The dovish decision by the US Federal Reserve has also erased worries about an outflow of funds.

Muted domestic inflation has prepared the ground for the Reserve Bank of India (RBI) to cut the repo rate, either at its scheduled monetary policy meeting on September 29 or earlier as it has done on occasions. Mandarins in New Delhi and industry captains have been pressing the central bank to ease policy to support investment and growth, both vital to create jobs for the millions pouring out universities in the world’s second-most populous nation.

“We continue to see CPI inflation undershooting the RBI’s 6 per cent objective by about 50 basis points in January 2016,” economists at Kotak Securities said in a report. “This, in conjunction with a dovish Fed, should pave the way for a 25 basis point repo-rate cut at the upcoming RBI meeting.”

Retail inflation as measured by the consumer price index (CPI) slowed to 3.66 per cent in August from a revised 3.69 per cent a month earlier, as global oil prices dropped below $50 (Dh184) a barrel and commodity prices remained subdued in the wake of souring Chinese appetite. Wholesale prices in India slumped an annual 4.95 per cent in August, falling for the tenth consecutive month.

Rate cut calls have grown louder after economic growth slowed to 7 per cent in the June quarter from 7.5 per cent in the previous quarter.

Looming deflation

Arvind Panagariya, a former Columbia University economics professor who runs the government’s main planning body, last week said the economy needed 50-100 basis points of rate cuts. Earlier, Arvind Subramanian, Prime Minister Narendra Modi’s chief economic adviser, warned of looming deflation and called for measures to boost consumer demand and higher investment.

The Fed’s move to hold US rates near zero, citing global economic problems, is also a relief for the RBI. “In light of the heightened uncertainty abroad ... the committee judged it appropriate to wait,” Fed chief Janet Yellen told a news conference in Washington DC.

For emerging markets, the US decision helps in two ways: the dollar will lose its strengthening bias and ease depreciation pressure on other currencies and there will not be any immediate withdrawal of funds from riskier assets.

Sensex, rupee up

Signalling the underlying trend, shares rallied the most in two months on Friday after the Fed decision and the rupee notched its best one-day performance in two years.

The top-30 Sensex, which is closely tracked by fund managers, climbed as much as 2 per cent on Friday before paring the rise to 1 per cent at 26,218.91 by close. The broader 50-share Nifty too followed the same pattern. Both the indices gained 2.4 per cent and 2.5 per cent for the week.

“The rate-cut expectations and upcoming festivities will provide support to the Indian markets in the near term,” Anindya Bhowmik and Kinshuk Bharti Tiwari at PhillipCapital India said in a report.

Demand for cars and consumer goods normally rise in the run up to festivals such as Diwali, when most businesses hand out annual bonuses to their staff across much of India. A reduction in borrowing costs should provide an additional push to the spending, something companies have been waiting for to step up output.

The rupee strengthened 1.2 per cent on Friday to 65.6750, its biggest gain since September 2013 and the best level since August 20.

According to Goldman Sachs, the rupee, Mexican peso and Czeck koruna were the relative bright spots in an otherwise depressed emerging market cyclical picture.

“Activity data have also been a bit better in India from disappointing levels,” the US investment bank said in a report. “Industrial production was better than expected and our current activity indicator improved in the second quarter to 5.1 per cent quarter-on-quarter annualised from the surprisingly weak 4.2 per cent in the first quarter; and while legislation on GST reform has stalled, there has been important progress on banking reform.”

Meanwhile, data released on Friday, showed India’s foreign exchange reserves climbed by $2.359 billion in the week ended September 11 to $351.39 billion, reversing a drop over the previous two weeks.

Nomura picks JustDial

Online search services provider JustDial is a good bet for appreciation, with a new app launched recently providing a major fillip, according to brokerage Nomura.

“We believe JustDial’s new Android app launched last weekend is a step-jump improvement over the previous version across look and feel, flow, categorisation of Search Plus offerings and newer features,” analyst Ashwin Mehta said in a report.

He reiterated the brokerage’s target price of Rs1,800 for the stock, indicating potential for nearly a doubling in the price. The stock closed up 3.7 per cent on Friday at Rs933.75.

“We believe the stock correction of 33 per cent year-to-date (versus a 5 per cent decline in Nifty) provides an attractive entry point,” Mehta said.

Rising use of online services for shopping, ordering food, booking tables in a restaurant, travel, buying grocery and medicines as well as getting car maintenance, or drivers, plumbers, carpenters and so on underpin the potential for JustDial, he said.

“We think India’s eCommerce industry has the potential to grow 4 times by 2019, led primarily by increasing internet penetration (driven by smartphones), under penetration of digital media, the large untapped market and improving macroeconomic fundamentals.”

 

The writer is a journalist based in India.