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BW Businessworld

Rising Prices, Falling Markets

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The stockmarkets did not give equity investors the kind of start to 2011 they were hoping for. The benchmark BSE Sensex has fallen around 1650 points, or 8 per cent, since the beginning of this month mostly on concerns over the government's inability to control food inflation (it is almost 17 per cent now). This would reinforce expectation of an interest rate hike by the Reserve Bank of India at its next policy meeting later in the month. Market is expecting a 25-50 basis point hike in key interest rates.

To begin with, it was the inflation number reported on 6 January that saw food inflation sky-rocketing at 18.32 per cent for the week ended 25 December. Then came the weak index of industrial production (IIP) numbers for November 2010 — 2.7 per cent compared to 11.29 per cent in October 2010. To make things worse, IT bellwether Infosys on 13 January reported a performance that missed street expectation. Moreover, on 14 January, the government announced December wholesale price inflation at 8.43 per cent compared to 7.48 per cent in November. Though it was in line with market expectation of 8.3-8.5 per cent, it failed to pacify investors, at least on that day.

High prices are acting as a big dampener. "Inflation has been a negative surprise that has sharply pulled down the market," says Manishi Raychaudhari, MD and head of equity at BNP Paribas Securities. "We all thought inflation would come down by November-December on the back of high base effect and good crop production, but it did not materialise. Inflation is a serious concern for the market; as a consequence, investors are sitting on the sidelines." Akash Prakash, fund manager & CEO at Amansa Capital, agrees: "India can't grow with inflation, therefore government spending will be muted, restricting growth, which can have an impact on corporate profitability."

MSCI India Index is also bleeding. It has fallen 5.5 per cent (till 12 January) compared to MSCI Emerging Market Index rise of 1 per cent. Foreign institutional investors (FIIs) have sold over $500 million worth of Indian equities till 12 January. Lack of FII flows and rising crude oil prices will have a severe impact on current account deficit and concerns are it can surge to 4 per cent from 2.9 per cent (September 2010). 

Will inflation continue to haunt investors? Experts say clearing of supply-side bottlenecks will bring some respite, but it will take time. For now India will have to live with higher inflation. "This decade could be of agriculture. Price rise in agri-commodity is a global phenomenon. We will have to live with it," says Ravi Gopalakrishnan, executive director and chief investment officer, equity at Pramerica AMC, "Markets are never black and white. Events will continue to move the markets. Volatility, he believes, will dictate the markets in 2011. "Unlike the previous decade, today India is in a much better position; I am therefore not worried unless crude oil rises over $100 per barrel. Our markets will consolidate for a little while and a 5-10 per cent correction doesn't matter. In fact it will throw up buying opportunities."

With no good news in the domestic front, investors have to look outside for some. The US economy is expected to bounce back and that could mean reversal of fund flows to emerging markets such as India. Improvement in the Euro zone with Germany posting better than expected GDP growth and Portugal's successful bond sale do not augur well for the Indian equity market in the near term.

(This story was published in Businessworld Issue Dated 24-01-2011)