The stock market is likely to remain firm ahead of Diwali, as the financial performance of Indian Inc has so far not disappointed street expectations.

However, the Reserve Bank of India's policy move could spoil the party at Dalal Street. With headline inflation showing no signs of any correction, market participants expect another rate hike of 25 basis points. The RBI is meeting on October 25 to decide on key interest rates.

Corporates are mounting pressure on central bank to pause on current rate tightening, as they are already struggling to raise funds to meet capital expenditure. However, the RBI Governor, Dr D. Subbarao, has reemphasised that inflation must ease before the central bank can reduce interest rates, signalling a tight monetary stance for now.

Sustained buying by foreign institutional investors helped Indian markets recover sharply last week. Markets even ignored the weak industrial growth for August on hopes that the global atmosphere would continue to be conducive, as Euro-zone is indicating some actions will be taken to contain the region's economic woes.

The slowdown in industrial production is not an India phenomenon alone. The HSBC Emerging Markets Index declined to 51.9 in the third quarter of 2011 which, according to it, ‘is the slowest in nine quarters.' Of the big-four emerging markets, Brazil and India recorded the fastest rates of decline in new export orders.

“Consequently, employment growth as measured across manufacturing and services eased to the slowest for nine quarters, reflecting a weaker rate of job creation in services and a stagnation of manufacturing employment. India recorded a decrease in headcounts for the first time since Q1 2009,” said HSBC report.

TeamLease, staffing firm, said that corporate India is likely to witness a slowdown in hiring in the last quarter of this year due to the global economic uncertainty. But the decline is only temporary.

These reports are worrying for India. According to Crisil research, the country needs at least 55 million additional jobs by 2015 to maintain the ratio of employed people to population at 39 per cent.

Another factor that could derail industrial activity is the acute power shortage. Electricity supplies have been disrupted in the past few weeks due to shortages in the availability of coal. Power stations' coal supplies from Coal India were affected by floods, heavy rains (in Orissa) and a strike by staff demanding higher bonus. Singareni Colleries' output has been affected by Telangana agitation.

Due to this, projects that supply power to Tamil Nadu, Andhra Pradesh, Chhattisgarh, Uttar Pradesh, Maharashtra, West Bengal and Madhya Pradesh are in a vulnerable situation.

Over 40 thermal power projects in the country have coal stocks for less than a week; 29 of these companies are facing an acute fuel shortage of less than four days of coal stocks.

Though the Government said the power situation will improve before Diwali — as it has directed generation companies with surplus coal to pass on some of their fuel to feedstock-starved units — industry analysts said that unless the supply situation is fixed, the immediate future's prospects are grim.

> badri@thehindu.co.in

Related Topics
comment COMMENT NOW