Crude+currency heave equals sulking Sensex

MUMBAI: With the price of gas approaching $4 a gallon, more commuters are abandoning their cars and taking the train or bus instead.
— Clifford Krauss reporting for The New York Times from Denver on Saturday

The Indian economy appears set to go the American commuters’ way and get off the 8%+ fast lane as fighting oil-fed inflation becomes the priority for governments and central banks around the world.

Finance minister P Chidambaram and his election-mode, anti-incumbency-wary government certainly won’t mind sacrificing growth to pacify the divine electorate.
The market, as a thumb rule, discounts such possibilities in advance and is likely to sulk. Experts, therefore, predict a rangebound week.

Morgan Stanley analysts Ridham Desai and Sheela Rathi say the signs are ominous. In a strategy report on Friday, they wrote, “Over the past few days, the worst possible macro outcome for India seems to be unfolding with a depreciating currency and stronger commodity prices (notably oil). This macro outcome lends itself to higher inflation and thus a tighter monetary environment and creates downside risk to growth.”
According to the analysts, the factors that supported the one-month-long rally are no longer in play and a reversal is on the cards.

 “Sentiment has recovered, valuations are off the lows, and India has started to outperform emerging markets.

The macro remains an important input and the trigger for a reversal in the rally could be a falling rupee and rising commodity prices.”

Manish Sonthalia, equity strategist, Motilal Oswal Securities, says oil is the biggest worrying point for the market. “Diesel shortage could be a  reality and that is playing
on top of the minds of most players.”

The oil boil has caused a flight of FII money. Including provisional figures for Friday, overseas players sold equities worth Rs 1,733 crore last week.

During the Sensex speed drive from 15K to 20K levels late last year, rupee appreciation was one of the three angels (high interest rates, high growth and rising currency - known as the impossible trinity) that wooed an army of foreign investors to Indian shores.

Today, high interest rates have turned into a monster threatening to kill the growth angel and the rupee’s reversal marks the end of the fairy tale. The Indian currency saw its sharpest fall in ten years last week.

Sonthalia says, besides the oil, the falling rupee is another reason FIIs are on a selling spree. “Some forecasts put rupee going down to 42-43 levels against the dollar. That is forcing them to sell. Mutual funds are absorbing this selling to some extent.”

Though they have been sitting on huge cash, mutual funds were not big buyers last week. “Mutual funds may start nibbling technology, mobile telephony and to some extent commodities like metals at lower levels. Downside will not be very big. I expect the market to trade in the range of 16,800 and 17,500 for this week,” said Sonthalia.
However, rate-sensitive segments and oil companies may not see any respite, he added.
Vedprakash Chaturvedi, MD, Tata Mutual Fund, said, “My sense is that market will obviously react to the upward pressure on commodity prices, including oil and food prices. Given this reality, I feel inflation in India is still understated, meaning it’s more than what is reflected in the numbers.”

According to Chaturvedi, this could lead to an upward pressure on interest rates. In such a scenario, the market will put a question mark on the long-term growth story. “So, in the near term, market will remain in a trading band of 5-7% from the current levels.”

“While inflows have been good in the last two months, our aim is to deploy money carefully. In debt, the focus is on the shorter end. In equities, a lot of focus is on the sustainability of earnings growth and their certainty over years. We are looking for long-term stories with a 3-5 year perspective.”

Sitting on cash is not a strategy, he said, adding, the idea is to deploy gradually.

n_subramanian@dnaindia.net