Indian stocks at lowest level in more than 2 years
By NICK GODT
Indian stocks ended the week at their lowest level in more than two years, with fear of recession in the euro zone fueling global investment uncertainty while the Reserve Bank of India warned of risks to growth.
"The global economic outlook has worsened significantly," the central bank said in its mid-quarter policy review Friday, as it signaled a shift away from its 21-month long inflation-fighting campaign.
The RBI, as was expected, left interest rates unchanged following 13 rates hikes since March 2010 but it also signaled a shift in policy.
"From this point on, monetary-policy actions are likely to reverse the cycle, responding to the risks to growth," it said.
Those risks have mounted all year due to the impact of high interest rates domestically and with the crisis in the euro zone, a key trading partner.
But investors, who already expected the RBI to pause its tightening campaign, were disappointed that no clearer signals were given as to when the central bank might begin to cut interest rates.
On the Bombay Stock Exchange Friday, the Sensex shed early gains to finish sharply lower, losing 2.2% to 15,491, its lowest close since November 2009.
For the week, the benchmark index lost 4.5%.
Hardest hit on the Sensex were shares of telecom firm Reliance Communications Ltd. , down 12.9% for the week; followed by engineering firm Larsen & Toubro Ltd. , down 12.3%, and Reliance Infrastructure Ltd. , down 12.1%.
Banks also failed to benefit from the RBI's shifting stance, with State Bank of India losing 3.7%, HDFC Bank Ltd. off 3.6%, and ICICI Bank Ltd. down 3.2%.
The central bank also left unchanged the portion of cash deposits it requires banks to maintain, against market expectations that it might follow the lead of other Asian central banks in relaxing requirements to boost liquidity.
But this speculation was "misplaced", said Leif Eskesen, HSBC's economist for India, as the RBI made it clear its cash reserve requirements were part of its "monetary policy tool kit".
Lowering requirements would have been similar to easing monetary policy, while inflation, which still remained above 9% in November, is still a key concern for policy makers and will remain so for some time, he said.
There has been some concern that India’s regulated banking system, along with many Indian firms, might be facing liquidity issues, given high interest rates domestically, shrinking global investments, and a sliding rupee.
Year to date, the Sensex is now down 24.4%, among the worst performing emerging markets.
With a the crisis in the euro zone fueling investment uncertainty, lower exports, and India’s huge import requirements weighing on the currency, the rupee has slipped to record lows, following a near 20% slide since July.
On Thursday, the RBI announced further measures to try and curb short-term speculation in the rupee, while trying to attract more foreign inflows.
Yet, even as a weak rupee further lifts the costs of India’s imports, especially oil, it's also likely to help support profits for many Indian companies, according to Standard & Poor's.
"Revenue for companies that export and operate overseas will rise because they will get more rupees for goods and services they sell," S&P analyst Mehul Sukkawala said in a report.
This should help "soothe the pain" from weak demand, both in India and globally, S&P said.
Large technology outsourcers, such as Tata Consultancy Services Ltd. are likely to benefit the most because they have a large presence overseas, while carrying little debt, the rating agency said.
On the other hand, companies with large borrowing levels from overseas, such as telecom firm Bharti Airtel Ltd. are facing rising risks in servicing their debt.
Overall, S&P's report find that the slide in the rupee will be generally positive for technology firms, along with those in metals and mining, and the oil and gas refining/exploration sectors.
It should be neutral for telecommunication and power utilities firms, and be negative for oil marketing, autos and forest product companies.
But the global economic and investing environment should once again be key. A number of investment firms predict that, barring a hard economic landing globally, Asian equities should benefit from slowing inflation and easier monetary policies in 2012.
For Barclays Capital, the underperformance of emerging markets in 2012 could, after "pricing in too much pessimism," turn in their favor next year.
Dow Jones Newswires
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