Indices' slide may continue till Budget presentation

| Updated on: Feb 06, 2011

Dalal Street key indices are likely to breach known downward-support levels this week. Despite public posturing by the economy managers, market movers are aggressively discounting their ability to deliver in the face of mounting challenges. There could be stray attempts for resistance — either by the handful of operators, by “inspiring” news flow or by pure technical reasons necessary to readjust one's market-wide exposure.

But the overall trend in the short-term, at least till the 2011-12 Budget announcements, is likely to be the one of a downward slide.

According to market intelligence, investors are adopting new ways to hedge the mounting risks. A section of investors also appears predisposed towards exit strategy in the near term. They seem to be ready to re-enter later, not on account of reduction in absolute market valuations, but on reduction of risks, currently increasing almost by the week.

Margin pressure

The corporate earnings in the third quarter have indicated that margins are under severe pressure; forward earnings growth could be impaired to an extent that is not factored in the current valuations.

Market economists and fund managers are more or less unanimous on the challenges ahead. Strategies, however, vary. Deutsche Bank, for example, in its weekly note on the economy writes that India is facing twin deficit risk. Like others, it thinks that the prospect of high oil prices would complicate fiscal policy and pose upside risk to the current account deficit this year. This has implications for the savings-investment balance, as well as the growth outlook.

high inflation

“Presently, India's current account deficit is around 3 per cent of GDP while the consolidated fiscal deficit is around 8.5 per cent of GDP — both significantly large. Total savings (up at 33.7 per cent of GDP in 2009-10, from 32.4 per cent in 2008-09) and investment (36.5 per cent of GDP vs. 34.9 per cent of GDP) however are on a rising mode, after having slowed down during the global crisis. Reliance on large current-account deficits to fund domestic growth when the fiscal deficit is high could be risky.”

Economists, moreover, are of the opinion that a high current account deficit has generally coincided with high wholesale price index (WPI) and vice versa.

“The bottom line is that a concerted effort towards fiscal consolidation (starting with the upcoming Union Budget) would help to increase the total domestic savings in the economy and in turn support a higher investment and growth rate without putting excessive pressure on the current account deficit,” the Detsche Bank note adds.

Given the current trend, they think that WPI inflation would be closer to 7.5 per cent by end-March 2011, 50 basis points higher than the RBI's forecast of 7 per cent. Consequently, we expect RBI to continue hiking rates in March as well as May (25 basis points in each meeting), which should push up the repo rate to 7per cent.


Published on November 10, 2017

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