The Hindu Business Line : Sensex may settle a little higher on inflation hopes

Downtrend: Traders at a share-trading house in Kolkata. The Bombay Stock Exchange benchmark Sensex shed 6.28 per cent in the opening week of the new fiscal as rising inflation and a new accounting norm made investors jittery amid continued fears of a US recession. –

Dalal Street and the central bank or North Block rarely share an identical concern. Of late, they are. All the three are seeing signs of trouble in the WPI level inflation.

The market’s immediate worry is whether the rising trend in inflation would push down GDP growth dramatically in 2008-09 and cause serious outflow from equities.

Snowball in summer

If the interest rates turn northwards, prospect of such a snowball effect going real for the economy may not be endearing for the corporations and the equity street. At this stage it may be little too premature to pontificate on the extent of the damage, but even the brave hearts do not rule it out.

Sentimentally, the market is passing through a phase clouded by uncertainty. Volumes are in the low range in terms of recent histories and sellers are more than the buyers. Deeply immersed in local troubles, Dalal Street last week ignored signs of recovery in global markets. The Wall Street benchmark Dow Jones Industrial Average bounced back smartly after days of decline.

This week, the Sensex, local benchmark index, may settle a little higher in the hope that the announcements in the next few weekly inflation figures may not show as steep a hike as it did in the last few weeks.

But, this will understate the lurking fear. Already brokerages internally have started revising their own GDP growth estimates for 2008-09 – some brought it down to 7.5 per cent. Institutional investors have been postponing their purchases and slowly accumulating cash instead. But some fear that there were initial signs of larger liquidation as well.

In the short term, the BSE Sensex is likely to move in a range between 14,500 and 16,000 points.

Slower credit offtake growth (from over 30 per cent to around 21 per cent year-on year) and lower IIP numbers have alarmed the business economist community. If the central bank signals hardening of interest rate, which is widely apprehended in the short term, the slow down may accentuate and may affect corporate financials.

India story

Nobody has officially aired the fear that the India story is turning pale. But some experts have begun saying that India’s financial position is weaker than it might appear. Apart from slowing exports income from the US and rising inflation, a latest study by India Knowledge@Wharton lists other economic troubles. It said “the country has foreign reserves less foreign debt of about $100 billion, imports of crude oil needed to cover 85 per cent of its 2.6 million barrels per day consumption, a domestic budget deficit/GDP of 8 per cent in 2007 and total public debt/GDP of 73 per cent”.

Healthy domestic consumer spend estimated at $600 billion, is still considered a long term positive. Major long term changes in the global supply-demand scenario may eventually also go in favour of Indian manufacturers and service providers. But, those are strictly long term.

(Responses may be sent to jayanta@thehindu.co.in)

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