Sunday, August 10, 2008

Oil and inflation to set the trend

Mumbai: Oil and inflation will be the twin factors that will set the trend for Indian shares this week, with any further decline in energy prices bound to spur a rally and raise expectations for foreign portfolio inflows.

Momentum indicators on the charts point to strong short-term upswings, supported by rising volume and improving sentiment. But lingering concerns about growth, both domestic and global, and the prospect for slowing corporate earnings should keep gains on a tight leash.

"We have had an unexpected boost from falling oil prices, but the jury is undecided on the outlook," said equity trader Anmol Mehta.

Huge relief

India, which imports 70 per cent of its oil, has been grappling with 13-year high inflation for months as crude prices climbed to record highs. So the drop in oil prices to below $115 a barrel from highs of nearly $148 last month was a huge relief for the market.

"If you think the oil price is going down, then that's a great positive thing for India in the context of Asia, and I think we have seen the worst," Mark Matthews, chief Asia equity strategist at Merrill Lynch, said in Mumbai earlier this month.

He forecast oil prices to drop to $110 by the end of the year.

Stock trader Deepak Patel said if the fall in energy prices was maintained, it would cool inflation concerns and help set the stage for lower interest rates in the coming months.

"Any sign of inflation losing momentum will be a signal for the bulls to get their tails up," he said. "Battered financials and auto stocks should breathe easy."

However, inflation, which topped 12 per cent in late July for the first time since 1995, is unlikely to come down in a hurry and the Reserve Bank of India (RBI) may not be over with its iron-fisted monetary policy.

"I think inflation could moderate to 8-9 per cent by March-end," C. Rangarajan, a former RBI governor who headed the prime minister's economic advisory panel, said last week, adding softening global crude prices would help ease domestic prices.

But he cautioned the tight policy stance of the central bank would continue unless there was a significant change in the price situation.

The Sensex rose 3.5 per cent last week to 15,167.82, led by financials such as ICICI Bank, carmaker Maruti Suzuki and engineering conglomerate Larsen & Toubro. It was the highest close in nearly two months, and the stretch of gains for five consecutive weeks was the best this year.

"The market is well poised to extend the rally (this) week," said Patel. "I expect foreign interest to start kicking in."

Foreign funds have been sellers of about $6.7 billion of stocks this year, but in one day last week they bought more than $400 million of equities indicating money managers would grab opportunities when they come by.

However, worries the global credit problem could spread to more countries and the US economic downturn could persist longer pose a threat to equity markets. Growth in India will be lower than earlier estimates, said Rangarajan, just before he stepped down as the head of the prime minister's panel last week.

"We are looking at a growth rate between 7.5-8.0 per cent this fiscal," he said. Last month, the RBI cut its growth forecast to 8 per cent from 8-8.5 per cent previously, but its prediction was above many private banks' outlook for the Indian economy.

- The writer is a journalist based in India.

Bourse plan: Investment shelved

Bombay's stock exchange scrapped a plan to buy a 26 per cent stake in the National Multi Commodity Exchange, the Hindu Business Line said, without saying where it got the information. The exchange's board made the decision on Friday after previously agreeing to buy the stake in the Ahmedabad-based bourse for Rs1 billion ($24 million), the newspaper said on Saturday.

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GulfNews, United Arab Emirates