India markets weekahead: High inflation, fear of rate hikes to make markets jittery

August 13, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Markets continued to go on a losing spree with benchmark indices in India falling further by 2.6 pct. As if the axing of the U.S. rating was not enough, talks of a France credit rating downgrade lingered, chopping around 4 pct from global indices in a single day during the week.

Back in India, results from stalwarts like Hindalco, Tata Steel, Coal India failed to shield the local market from the global bear tide. With Q1 results almost over, the market would have to look for other remedies for sustenance.

The better than expected IIP data for June has done more harm than good by confirming fears of further rate hikes on the back of higher Inflation. Next week, we will have inflation numbers, consensus being upwards of 9.2 percent, which would keep the markets nervous.

The global risk aversion has pushed gold towards $1800, while silver continues to be below $40. Equities saw a flight of funds towards safer avenues.

As an early indication of slowdown, crude oil fell close to $80 during the week after multi-month sustenance above $100. It has been blessing in disguise for a country like India having a huge oil import bill. The rally in OMCs like BPCL, HPCL, IOC was a fallout of this move.

The U.S. issues have put the $60 billion Indian export industry in jeopardy, as 60 pct contribution comes from that country. The expected strengthening of the rupee and volatility in forex markets have also left it struggling.

Mammoths like Infosys, TCS, HCL Tech, Wipro have already lost a significant portion of multi-month gains during past week. The visa issues, effect on project pricing, shuffle in management would be new age challenges for this sector. We are sceptical of this sector for a short-term perspective but would look for entering in dips due to cash rich status of leaders in the segment.

Keeping global headwinds aside for a while, it gives immense confidence in an economy like ours where India Inc, amid high borrowing rates and soaring raw material costs, has been showing resilience by growing decently in the top and bottom line.

Hence, we are confident the companies here would sail through and emerge further stronger in the years to come. Similarly, it is just a matter of time the foreign funds would find safer opportunities and a better destination in the form of Indian markets. It builds up the case to start participating in domestic stories.

The only “joker in the pack” is the government machinery which is yet to move out of the deep slumber and we hope that reforms and effective governance is back on track. Else it would be a missed opportunity for 1.2 bln Indians during this long journey of transition of leadership from the West to the East.

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