Global cues likely to dominate market

April 8, 2012

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

The Indian market ended with minor gains in a truncated week as data showing slowdown in growth in the services sector in March and weak global stocks hurt sentiment.

Growth in the Indian services sector slipped to a five-month low in March as optimism about the business outlook in the coming year faded to its weakest level since 2009. According to HSBC’s India PMI, service sector activity fell sharply to 52.3 in March from 56.5 the previous month, though it remained above the 50 level that divides growth from contraction for the fifth month. Momentum in the services sector eased on account of lack of economic policy progress and continued high inflation which is expected to remain elevated due to factors such as high crude oil prices. Thus, we feel that the Reserve Bank of India is likely to approach policy easing cautiously as the upside risks to inflation remain.

Coal India was the story of the week as the government issued a rare presidential decree to force Coal India to sign fuel supply agreements, binding it to provide at least 80 percent of the coal required by power plants. This is part of the government’s efforts to revive the ailing Indian power sector. This further confirms the fears of foreign institutional investors about corporate governance issues and one of them has already filed a complaint regarding the Coal India issue. India may be having one of the largest coal reserves in the world, but it still has to import its coal requirements as Coal India is unable to fully exploit the reserves which results in demand outstripping supply. Opening up of coal mining to the private sector in the last few years has resulted in the Comptroller & Auditor General of India (CAG) suggesting another scam. Hence the demand/supply gap is expected to continue in the foreseeable future.

On the political front, the fragile coalition government is a cause of concern. With successive state elections, we are moving towards a scenario of strong states and a weak centre which has resulted in too many cross-currents leading to policy fatigue. As mentioned in my previous column, policy paralysis is preferable to retrograde policies. GAAR is perceived to be one in spite of assurances from the government. Curtailing subsidies has been one of the cornerstones of the recent budget but the indecision on raising petrol prices especially ‘deregulated’ petrol goes to show no tough decisions affecting the electorate can be taken easily.

Globally, the focus is on the U.S. markets after the Fed minutes last week indicated it is less likely to take further stimulus measures. Also, a disappointing March employment report was released when the market closed on Friday. The U.S. unemployment rate fell to 8.2 percent, the lowest since January 2009, from 8.3 percent. The global equity markets are thus poised to fall early this week.

The focus is likely to be on several key economic releases from China and the beginning of U.S. earnings season. China is set to release first quarter gross domestic product, inflation figures and trade balance data. Signs of a sharper-than-expected slowdown could further undermine sentiment.

Back home, the markets are initially expected to open down as global markets will react to the weak U.S. employment report. The coming week sees the onset of FY12 earnings season with the results of Infosys out on Friday.

Infosys’ topline in Q4FY12 is expected to register flattish sequential growth of 0.14 percent to $1.8 billion as a delay in decision making, setback in project ramp-ups and huge uncertainty in the system would have affected volume growth. Operating margin is expected to register a de-growth of 154 bps sequentially to 29.64 percent as utilisation would be affected by lower volume growth and unfavourable rupee movement against the dollar. The company has $847 million of open revenue hedge position for Q4FY12 which is 46 percent of its revenue. It is thus expected to book lower forex losses in the current quarter as the rupee on a closing basis has appreciated by 4 percent quarter-on-quarter. Hence, the bottomline of the company is expected to decline by only 66 bps sequentially to 24.85 percent this quarter.

On the macro front, data on industrial production for February will be unveiled on Thursday. Industrial production grew 6.8 percent in January, lower than the 7.5 percent growth recorded in January 2011. Data on inflation based on the wholesale price index (WPI) for March will be released on Friday. This will provide vital cues on the central bank’s likely policy stance at the monetary policy review due on April 17.

As far as Nifty is concerned, we continue to maintain our cautious stance with increasing risk of it hitting close to the 5000/5050 mark. The RBI policy meet on April 17 is most likely to be a non-event as we do not expect it to start the easing cycle yet. As such, there is not much expectation on the IIP data front and global cues are likely to remain dominant this week.

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