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Mumbai: There will be more pain ahead for Indian shares after plumbing six-month lows last week, with a slump in US jobs indicating a worsening crisis in the world's biggest market.
Although India's $1 trillion economy is mainly driven by domestic demand and is better placed to weather a US recession than other export-powered countries, it cannot escape some aftershocks.
"The market is like a cat caught on a hot tin roof," said equity trader Kevin D'Souza. "It's very nervous and jittery."
Like last week when it was disclosed that ICICI Bank had taken a hit of $264 million on its overseas investments in derivatives, following the market turmoil caused by the US subprime woes.
ICICI, which is also listed on the New York Stock Exchange, said the losses were mainly "notional", meaning it was only writing down the value of the investments based on the current market prices and insisted the quality of the underlying asset - mostly Indian companies - was good.
But the damage was done. The write-down set off alarm bells about the likely exposure of other banks to such products. ICICI shares slumped 18.2 per cent last week to Rs892.75, their lowest close since about mid-September.
Sentiment for financial stocks also took a beating after the finance minister advised state-run banks to lower interest rates on home loans for up to Rs2 million, while fears mounted that a government plan to write off $15 billion of farm loans may encourage other farmers to default on repayments.
State Bank of India lost 12.7 per cent last week to Rs1,841.8, with the slide hastened by Credit Suisse's decision to cut the stock to "underperform" from "outperform". The Swiss brokerage also downgraded Punjab National Bank, Indian Overseas Bank, Union Bank of India and Bank of India.
"Uncertainty will likely continue for at least two quarters until the loan waiver is finalised," it said. "The risk perception associated with agricultural lending for government banks has risen significantly."
Last week the Sensex tumbled 9.1 per cent - its biggest weekly fall in nearly two years - to 15,975.52. It was the lowest close since September 18, when a US rate cut triggered more than $7 billion inflow in about seven weeks to end-October and powered the index to an all-time high of 21,206.77 on January 10.
The index has lost nearly a quarter from that high and has sunk below its 200-day moving average, indicating a bearish trend, chartist Kanu Dave said.
Worrying factor
"A worrying factor is the culmination of weak technical and fundamental factors," he said. "It will be very difficult to pull back from this slide because any recovery will be short-lived."
Strategist V. Venugopal said the fall in prices of many blue-chips have made them good bargains for long-term investors, especially in the context of a slowing global economy and the prospect of at least 20 per cent growth in corporate earnings in India.
However, market volatility will rise in the coming weeks as a wobbly US economy, defaults and write-downs continue to rattle investors, driving them away from high-risk equities to the safety of bonds and bullion, he said.
Late on Friday, US payroll data for February showed a cut of 63,000 jobs, the biggest monthly fall in five years. The data also revised upwards job losses in January to 22,000 from 17,000 reported earlier.
"The data should reinforce expectations for another hefty US rate cut this month," Venugopal said. "I wouldn't be surprised to see the rate at 2.25 per cent from three per cent."
If this were to happen it would widen the spread between the US and India's main short-term lending of 7.75 per cent, and could encourage flows to higher-yielding Indian assets. But the Reserve Bank of India (RBI) is unlikely to follow suit and lower domestic rates, which have been held steady for nearly a year.
RBI Governor Y.V. Reddy said on Friday fighting inflation was a bigger priority than growth because spiralling prices hammered the poor immediately while the benefits of economic expansion took time to trickle down to the lower strata of society.
India's annual inflation in late February shot above five per cent for the first time in nine months, and analysts say the outlook is bleak because of rising oil and commodity prices.
- The writer is a journalist based in Mumbai.
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