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BW Businessworld

Market Trips, Economy Falters But Hope Still Lingers

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Despite misgivings on the part of rating agencies and bank economists, India has emerged as the second most promising market after China in terms of maximum opportunity for rapid growth among emerging market economies. And this comes at a time when red alert has been sounded about a likely fall in India's sovereign rating with the country being put on a negative watch-list first followed by a downright downgrade. The Sensex also dropped more than 2 per cent in its biggest daily fall on Thursday since late February, while the rupee also slipped, after a spike in global risk aversion triggered fears of foreign selling. To top it all, 12 IPOs have already been called off in 2012.

According to the survey by Tata Communications in association with research company Vanson Bourne, more than half of the respondents believe China offers the maximum opportunity for rapid growth opportunities, followed by India at 46 per cent and Brazil at 26 per cent. Russia comes a distant eighth with just 11 per cent of emerging market business leaders feeling it offers rapid business growth.

Going ahead, 39 per cent of all global respondents stated that their organisation is looking at expanding into India, making it the second most favoured market for global expansion after China at 51 per cent. While China led the pack of FTSE Emerging Market Index countries considered to be most progressive, as 42 per cent of respondents from China, India, South Africa and the Middle East selected China. This compares with 27 per cent who selected India and just 1 per cent who indicated that they believed Russia to be most progressive.

Interestingly, 75 per cent of Indian respondents selected India as the market they felt offered most rapid growth opportunities and Indian companies expect to increase their investment in emerging markets, including India, by 39 per cent in the next year.

The BSE Sensex dropped 405 points on Thursday while the rupee also slipped. Global developments coupled with a waning confidence in a struggling government, saw accelerated selling in the afternoon. Unexpected sharp falls in manufacturing at Germany and France, added to data earlier that also showed a drop in the HSBC flash manufacturing index for China, ate away at the market confidence.

Disappointing figures out of China and the 17-country Eurozone have prompted investors to cash out of stocks, following a strong run in previous weeks. Many traders are wary of further pushing up indexes, many of which recently hit multi-month highs.

The catalyst to Thursday's retreat was a Chinese manufacturing index compiled by HSBC. Its main index fell to 48.1 in March from 49.6 in February. Figures below 50 indicate that manufacturing is contracting.

The rupee dived to its weakest level in more than two months, with the RBI suspected to having intervened to prop up the local currency.

The partially convertible rupee ended at 51.17/18 to the dollar, after sliding to as low as 51.28 earlier, a level not seen since January 16. The unit had closed at 50.66/67 on Wednesday.

Dealers said the Reserve Bank of India is likely to have intervened for a second in a session in a row to shore up the local currency, which has dropped around 2 percent in nearly a week.

"Global factors weighed more than domestic reasons, as unexpected weakness in euro zone PMI data caused a massive risk sell-off and hit currencies across the board," said a currency strategist for a foreign bank in Singapore.

The negative news on the global economy came in a session coloured by an outcry over a reported $211 billion loss in revenues from the sale of coalfields, according to a leaked report from the Comptroller and Auditor General's (CAG) office.

That was then followed by the government's reversal in a recently announced hike in rail fares.

The news combined to spark fears that foreign investors would head for the exits, especially after the government's larger-than-expected borrowing plan in its 2012-13 budget last week raised doubts about its fiscal stance.

12 IPOs Called Off So Far In 2012
The secondary market and global liquidity hold key for the future of IPO market, according to Jagannadham Thunuguntla, Head of Research, SMC Global. The year 2012 has already seen call-off of 12 IPOs. The probable amount that these 12 IPOs were planning to raise was to an aggregate of Rs 5,461 crore. The list of the 12 companies who have called-off their IPOs during 2012 include Micromax, Embassy Property, Joyalukkas, Lokmat Media, VRL Logistics, Aravali Infrapower, etc. This is in addition to the call-off of 29 companies during 2011 calendar year. The probable amount that these 29 companies were planning to raise was to an aggregate of Rs 32,400 crore. So, starting January 1, 2011 till date, about 41 IPOs were called off. The total amount they were expected to raise was about Rs 37,859 crore.

All these 41 companies had valid Sebi approval in hand for their IPOs. Even then, they couldn't open their IPOs within the validity period of one year from the date of Sebi approval. This is expected to impact the Indian corporates' ability to raise funds to finance their expansion projects resulting in slowdown in capacity building and job creation.  Further, the government's disinvestment programme which was supposed to bring public issues of several blue-chip PSUs also couldn't take off. The recent lukewarm response to ONGC auction can also impact the confidence of the public issue market.

Deutsche Bank Cautions India
Deutsche Bank has cautioned that India's sovereign rating could be at risk in 2012 and ratings agencies could put India on a negative watch-list first and impose downright downgrade thereafter.

Deutsche has warned against India's fiscal fragility. India's Baa3 sovereign rating (assigned by Moody's) reflects not just the adverse fiscal position, but balancing factors such as high GDP growth rate (nominal GDP has grown by a average of 15 per cent in the past decade) and relatively high savings rate (decadal average of 31.5 per cent of GDP). These factors have made the fiscal position tenable so far, but they cannot be taken for granted as in recent years investment has slowed, partner country (especially those in the West) trend growth has declined, and domestic economic reforms have been few and far between.

A key risk to India's ratings outlook in the coming year or two is that the fiscal adjustment envisaged in the budget has not been accomplished due to unfavorable macro developments (e.g. further slowdown in growth) and policy slippages (e.g. a rise in the subsidy bill in the absence of administrative price adjustments). More crucially, if the slippage also reflects no medium term movement toward expanding the tax base (through implementation of the GST, bringing more services under taxation, and improving compliance) and expenditure restraint (by improved efficiency of social spending), the ratings outlook would invariably worsen.

The saving grace has been a noticeable turnaround in the global demand environment in the past few months, which has begun to help the Indian economic outlook as well. Additionally, if food prices don't jump, inflation could remain below 7 per cent this year even with some fuel price adjustment.

"The draft CAG report and fare rollback is damaging the Indian government's credibility further, which is spooking FII investors," said Nirmal Jain, chairman and managing director at brokerage India Infoline.

Biggest One-Day Fall Since Feb 27
Foreign investors are vital to Indian stock markets, and their strong net purchases of about $9 billion in the year to date had propelled gains of 14 percent in the Sensex as of Wednesday, gains which some fear could now be reversed.

The main 30-share BSE index fell 2.3 per cent, or 405.24 points, to close at 17,196.47, its biggest one-day fall since Feb 27. The 50-share Nifty index lost 2.5 percent, or 136.50 points, to end at 5,228.45.

Liquid blue chip stocks were among the hardest hit, with Reliance Industries ending down 4.1 per cent amid additional fears about slower earnings in the fourth quarter on the back of lower petrochemical margins among other factors.

Banks were also among the leading decliners, with SBI dropping 3.2 per cent.

(With agencies)