A breather in India’s rippling stocks rally offers new investors an opportunity to gain a foothold in Asia’s third-largest economy that is picking up steam as businesses shake off disruptions caused by demonetisation and a new consolidated national sales tax. The central bank is expected to keep interest rates unchanged at its midweek review in the wake of improving growth prospects and rising inflation.
The $2.3 trillion economy expanded 6.3 per cent in the three months ended September, accelerating from a shock slowdown to 5.7 per cent in April-June, and reversing five successive quarters of declining growth rate. Manufacturing, which contributes a quarter to GDP, grew seven per cent from 1.2 per cent in the preceding quarter, official data on Thursday showed.
“This indicates that perhaps the impact of the two structural reforms — demonetisation and GST — is behind us and hopefully, we can look for an upward trajectory in the third and the fourth quarter,” Finance Minister Arun Jaitley said.
More evidence emerged on Friday, buttressing growth was gathering pace. Factory activity in November sped at the quickest rate in 13 months, a private survey said, as companies raised output for the fourth straight month and new hiring grew at the fastest pace in five years.
The Nikkei/IHS Markit Manufacturing Purchasing Managers’ Index rose to 52.6 in November from 50.3 in October, above market expectations. The new orders sub-index rebounded into growth territory at 54.2 after contracting in October to 49.9. Export orders nudged higher after falling in the previous two months.
“India’s manufacturing economy advanced on its path to recovery as disruptions from the recent tax reform (GST) continues to diminish,” Aashna Dodhia, economist at IHS Markit, said in a statement.
“Growth in output and new orders picked up to the fastest since October 2016, reportedly supported by reductions in GST rates and stronger underlying demand conditions.”
Typical of the dictum “buy on rumour, sell on news”, seasoned market players who had built long positions took profits off the table after the data. It is a healthy trend for the market that has climbed more than a quarter this year, making it one of the world’s top performers.
The top-30 Sensex fell 2.5 per cent over the week to 32,832.94 and the 50-share Nifty shed 2.6 per cent to 10,121.80. It was the biggest weekly drop since mid-August, and there could be more declines. As many foreign fund managers earn their bonuses based on the performance of their assets, there will be pressure to book profits as the holiday season approaches.
“The profit-taking will bring down valuations and make stocks attractive,” equity salesman Anmol Bhushan said. “You can bet on bargain opportunities as the year winds down.”
Foreigners bought Indian shares worth $3.1 billion in November, the most since March, and fund allocation for the new year is expected to see a jump on the back of accelerating growth in the subcontinent. India’s central budget due in early February is tipped to focus on job creation and incentives for the rural economy, with an eye on the national election that must be held before mid-2019.
US securities house Morgan Stanley believes Indian stocks will outperform emerging markets in 2018 and it has raised its target for the blue-chip Sensex to 35,700 by December 2018, from 34,000 it forecast in June. Improving capital expenditure, fiscal spending, supportive global growth and buoyancy in consumer sentiment provide a strong support system for India’s growth in 2018, it said in a report.
Autos in top gear
Maruti Suzuki, which makes every second new car sold in India, said its November sales rose 14.1 per cent from the same month a year earlier to 154,600 vehicles. Demand for its compact cars such as Swift, Celerio, Ignis, Baleno, DZire and Tour S climbed 32.4 per cent while its sport utility vehicles including Ertiga, S-Cross and Vitara Brezza jumped 34 per cent. Overall sales for the year to date grew 14.6 per cent to almost 1.19 million.
Sales at Tata Motors, the country’s biggest maker of trucks and buses and also produces cars, raced 58 per cent in November, riding an upsurge in demand as disruption eased from New Delhi’s decision a year earlier to remove high-value bank notes that comprised 86 per cent of the currency in circulation.
Demand for medium and heavy commercial vehicles (M & HCV) trucks, which is an indicator of the health of the main economy, leapt 88 per cent.
“Increased demand for the new tonnage vehicles, infrastructure development led by government funding and keen focus on customer requirements has helped reviving the M & HCV performance,” Tata Motors said in a statement.
Mahindra & Mahindra, a leading maker of utility vehicles, said sales rose 18 per cent in November, which is usually a lean month after the festival season. “Our passenger and small commercial vehicles growth … have been very encouraging at 21 per cent and 29 per cent respectively,” Rajan Wadhera, president of the automotive sector at the company, said in a statement.
“We expect our growth momentum to continue on the back of some recent refresh launches as well as the positivity of our product portfolio.”
Hero MotoCorp, the country’s top maker of motorcycles and scooters, said its November sales quickened 26 per cent to 605,270 units, while Bajaj Auto’s sales grew 21 per cent.
RBI rate decision
The brightened prospects for growth is bound to ease the pressure on the central bank to lower rates, especially with inflation ticking up on the back of rising global oil prices. The monetary policy committee (MPC) of the Reserve Bank of India (RBI), scheduled to meet on Tuesday and Wednesday, is expected to hold its main repo rate unchanged at a seven-year low of six per cent.
However, the mandarins in New Delhi will not be happy if the central bank remains pat after the government ushered in a slew of policy initiatives to placate the RBI’s concerns. Since the central bank’s last policy in October, the government has announced a $32 billion bank recapitalisation package, plugged loopholes in the bankruptcy code and simplified the GST.
Clearly, the government wants the RBI to loosen monetary policy to jump start anaemic private sector investment. “The MPC has been way behind its own curve, its own stated goals,” Surjit Bhalla, a member of the Prime Minister’s Economic Advisory Council, wrote in the Indian Express newspaper, noting inflation had stayed below target for the last 12 months.
—The writer is a journalist based in India