|
Mumbai: The outlook for Indian shares remains grim this week as steaming inflation and rising interest rates threaten the pace of growth in the world's second fastest expanding major economy, driving investors to the sidelines or to the exit.
Weekly inflation data due on Friday is widely expected to hit its highest in 13 years at above nine per cent, with some econ-omists bracing for even double-digits propelled by an almost 11 per cent increase in government-set prices of petrol and diesel on June 4.
To douse inflationary expectations adding to the price spiral, the Reserve Bank of India (RBI) last week raised its main short-term lending rate, or the repo rate, by a quarter point to eight per cent.
It was the first rate increase in more than 14 months and took the number to its highest in nearly six years.
Higher interest rates will squeeze consumer spending, dampen demand and help contain inflation, but it will also hurt growth and slow down company earnings. "The market is on its knees," said equity trader Kevin D'Souza. "It's going to be a long haul - I don't think we are near the bottom."
Foreign portfolio investors, who usually set the trend for the market, have been voting with their feet. They dumped $1.7 billion of shares during June 1-12 and are net sellers of $5.6 billion since the start of January.
There is little respite likely because of mounting risk aversion, and expectations the rupee would weaken more in the coming months.
"Foreign funds are getting whacked by falling share prices and a weakening rupee," said D'Souza. "The outlook is grim."
Credit Suisse last week forecast the Sensex, the top 30-share BSE index, will slid to around 13,000 by the end of 2008 as record high global oil prices, rising inflation and higher interest rates depress growth.
The Sensex fell 2.5 per cent last week to 15,189.62. The widely-tracked index has fallen a quarter this year after rallying 47 per cent in 2007.
"The market is still not pricing in the much lower earnings growth being forecast by corporates and banks," said Nilesh Jasani, head of research at the Indian unit of the Swiss bank.
Economic expansion is expected to slow down to 8-8.5 per cent in 2008-09 from nine per cent the previous year, but private brokerages have forecast growth to 7-7.5 per cent.
Repo rate
HSBC said on Friday it expected the RBI to raise the repo rate by 50 basis points by end-2008 and increase the cash reserve ratio (CRR), or the level of deposits that banks must set aside with the central bank, by 75 basis points as the wholesale price index (WPI) based inflation on the boil.
"The key lies with the development of WPI, which we expect to hit double-digits in the not-too distant future and prove slower to fall than most, including the RBI, anticipate," HSBC said in a research note.
Annual WPI climbed to a seven-year high of 8.75 per cent on May 31, well above market expectations of about 8.3 per cent.
The central bank had raised the CRR by 75 basis points to 8.25 per cent in three moves over April and May, but surprisingly manufacturing output in April grew a robust 7.5 per cent in April from an upwardly revised 3.9 per cent in March.
HSBC said the pick-up in auto sales and the improvement in consumer durables were intriguing.
"Against this background the RBI must be less confident about the scale of the downturn in the economy and whether it has done enough to generate a period of sub-trend growth," it said.
The rupee fell 0.6 per cent last week to 42.94 per dollar, falling for a second week in a row, and traders expect it weaken beyond 43 this week.
The one-month offshore non-deliverable forwards contracts were at 43.16/26, indicating that large foreign investors and banks overseas saw the rupee weakening.
- The writer is a journalist based in India.
|
