Sunday, Apr 17, 2011
Gulf News
Mumbai India is facing a double whammy — factory output growth is slowing, while accelerating inflation is increasing pressure on the central bank to raise interest rates in early May for the ninth time in 14 months. This is a recipe that will leave a bad taste for equity investors.
Adding to the discomfiture is a disappointing start to the earnings season. Software services blue-chip company Infosys Technologies, which gets more than 90 per cent of its revenue from exports, reported on Friday a lower-than-expected rise in quarterly profit and forecast sales that were below the consensus estimates of brokerages.
The Infosys stock, which is fancied by foreign institutional investors, plunged almost 10 per cent on Friday after the earnings and guidance announcement posting its biggest fall in nearly two years.
“Infosys has traditionally beat market estimates. So the result was a shocker,” said equity trader Arjun Dalal. “This is bound to trigger a wave of earnings downgrades by brokerages.”
The outlook for smokestack industries such as steel, heavy engineering, automobiles and construction is also weighed down by slowing demand.
Industrial output in February, released by the government last week, grew at an unexpectedly slower annual pace of 3.6 per cent compared with economists’ forecast of more than five per cent.
Impact of tightening
“The data reinforces the effect of monetary tightening on the industrial front,” said Dalal. “Business confidence has taken a hit; the sharp fall in capital goods output portends a huge drop in investment and this will dent the overall growth in the coming months.”
However, despite the slowing factory output growth inflation is picking up pace. Annual inflation in March was almost nine per cent, well above February’s 8.31 per cent and market expectations for around 8.35 per cent.
The figure was more than an upwardly revised eight per cent forecast by the Reserve Bank of India (RBI) for end-March, and the central bank would be under greater pressure to raise rates aggressively this year. It is widely expected to increase key short-term rates by at least 25 basis points on May 3 when it is scheduled to release policy.
After extending March’s 9.1 per cent rally in early April, the top-30 Sensex fell last week for the first time in nearly a month and there could be a further downward move.
“I would not buy at these levels because I do not think valuations are terribly supportive,” market analyst Sangeeta Purushottam told ET Now television channel. “Some of the elements which were causing worry on the macro front are partly priced in, but earnings downgrades are yet to come.”
The writer is a journalist based in India.
By Geetha Bhaskaran?Special to Gulf News
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