The Sensex, the 30-stock bellwether index of the Bombay Stock Exchange (BSE), declined on Tuesday for the sixth trading session in a row, extending its loss to 6.6% since the slide began on 4 January amid fears that inflation would lead to further monetary policy tightening and rising commodity prices may crimp corporate profits.
The index lost 27.78 points, or 0.14%, to close at 19,196.34. This is the first time since late January last year that the market has declined for six straight days. Shares of interest-rate sensitive companies such as banks and real estate firms have been mauled in the slump that comes ahead of the 24 January monetary policy review by the Reserve Bank of India (RBI), when the central bank is expected to increase policy rates to check inflation.
Concerns of an imminent exit from stimulus measures and monetary policy tighten- ing had spooked investors even last year around the time of the monetary policy review in January. The markets fell by more than 7% then, before re- covering, as apprehensions of a premature exit from stimulus measures proved unfounded.
Foreign investors have sold more than $500 million (`2,265 crore) worth of shares net of purchases in four trading sessions this time, fretting that economic growth may slow if the government, which is under attack over alleged corruption and for failing to control inflation, applies the brakes on reforms. Investors are also worried that the fiscal deficit may be wider than anticipated on account of higher fuel and food subsidies.
Commodity prices are rising, increasing raw material costs for companies that will start reporting fiscal third quarter earnings this week.
Crude oil futures are trading at more than $89 per barrel. At these prices, the gross under- recoveries, or loss of revenue to oil market- ing companies that sell fuel at below cost, would increase almost 50% to `68,500 crore in 2011, said a recent note by Rajat Rajgarhia, head of research at Motilal Oswal Financial Services Ltd.
“In the absence of price protection, a 10% increase in international oil prices would have a 1% direct impact on overall inflation and another 60 bps (basis points) indirect impact within three-six months,“ the note said.
The Indian government has forecast 8.75% economic growth in the year ending March, but rising inflation, driven by food prices, has been a key concern.
“Expectations about both global growth and Indian economy have changed some- what in the past few weeks”, said Girish Pai, head of re- search at Centrum Broking Pvt. Ltd. “While a faster recovery in the rest of the world has made developed market equities look attractive, flows to India could be modest in the first half of the year owing to concerns over inflation and high fiscal deficit“, he added.
Factory output numbers for November, to be released this week, are also expected to be tamer with the Bloomberg consensus estimate at 7.3% against growth of 10.8% in October. Interest-rate sensitive sectors have seen the biggest fall on the market. While the Sensex has fallen by 8.6% since 5 November, when it recorded its lifetime closing high of 21,005, the BSE Realty index has plunged 33.2% and the banking index, the Bankex, 18.4%. Rising interest rates are expected to curb consumer demand for loans.
Amid uncertainties on both political and economic fronts, information technology (IT) stocks have found favour with investors on expectations of better revenue growth in an improved global economy. The BSE IT index has gained 5.8% over the past two months and stocks such as Infosys Technologies Ltd and Tata Consultancy Services Ltd are trading near their lifetime highs.
IT bellwether Infosys will kick off the earnings season on Thursday.
While any disappointment on its earnings could see some declines in IT stock prices, most analysts re- main upbeat on the sector because it offers better earnings visibility and is a relatively safer play on the global recovery.
“The out performance of IT should continue over the next few months”, said Dhiraj Agarwal, director of institutional equities at Standard Chartered Securities (India
Shares of consumer product makers and pharma companies have also moved up because investors tend to prefer these stocks in any uncertain environment as they are considered to be defensive sectors.
Interestingly, metal stocks have also outperformed the Sensex in the current fall as investors expect them to reap the benefits of a favourable commodity cycle.
“We are shifting our focus from the domestic consump- tion theme to more global plays and the commodity sector”, said Sudhakar Shanbag, chief investment officer at Kotak Mahindra Old Mutual Life Insurance Ltd.