Mumbai: Indian markets are not expected to perform well for at least another quarter on concerns of continuing sluggish economic growth and high fiscal deficit even as investors pin their hopes for a recovery post the budget.
The Sensex, BSE’s bellwether equity index, closed in the negative the last two sessions, and has three more sessions to go until the Union Budget for 2013-14 is unveiled on 28 February.
The 30-share Sensex is down 0.56% year-to-date at 19,317.01 points, after gaining 25.7% in 2012. Foreign institutional investors, or FIIs, the main drivers of Indian stocks, have pumped in $7.9 billion in Indian equities so far this year, adding to the $24.5 billion of net investments in 2012.
In the past decade, there have been 12 budgets, including two interim ones.
The post-budget situation, too, is not encouraging. On six occasions, the Sensex made losses in the week after the budget. However, the Sensex posted positive returns in the month following the budget seven out of 12 times.
“I don’t see any hope in recovery of earnings in the next quarter also,” said Vaibhav Sanghavi, director of Ambit Investment Advisors Pvt. Ltd, in a phone interview. “Fears that global liquidity may shrink, coupled with the redemptions faced by mutual funds and Ulips (Unit linked insurance plans) on the domestic front, are also collectively going to keep the market subdued. The market should be neutral to soft until the budget.”
Disappointing corporate earnings in the December quarter added to the woes of the markets.
According to a 15 February report by Macquarie Capital Securities India Pvt. Ltd, four stocks with large overseas earnings, namely Tata Motors Ltd, Tata Steel Ltd, Dr. Reddy’s Laboratories Ltd and Bharti Airtel Ltd, alone shaved nearly 10 percentage points off the net profit of Sensex companies.
Credit Suisse Group AG on 18 February cut its fiscal 2014 earnings per share estimate for the 50-stock Nifty index of the National Stock Exchange by 2.3%.
Minutes from the latest US Federal Reserve policy meeting also stoked concerns that the central bank’s policy-tightening moves would reduce global liquidity. This may not spell good news for the Indian markets that rely heavily on foreign fund inflows.
Rikesh Parikh, vice-president of equities, Motilal Oswal Securities Ltd, expects the domestic market to be largely unchanged ahead of the budget. “Markets should be largely unchanged ahead of the budget as investors would wait and watch as to what the finance minister has to offer,” he said.
Thursday’s budget will be presented against the backdrop of a difficult macroeconomic situation—the lowest gross domestic product (GDP) growth in nine years, sticky retail inflation, high interest rates and record current account deficit.
Earlier this month, finance minister P. Chidambaram said the government is confident of achieving an economic growth rate of around 5.5% in fiscal 2013. India’s economic growth slowed to a nine-year low of 5.3% in the September quarter. The Reserve Bank of India (RBI), in its third-quarter monetary policy review on 29 January, lowered the growth target to 5.5% from 5.8% and inflation estimate to 6.8% from 7.5% by the end of March.
The government missed its 2011-12 fiscal deficit target of 4.6% of GDP by 1.2 percentage points, leading to downgrade fears from ratings agencies Fitch and Standard & Poor’s.
India has a ‘BBB minus’ rating with a negative outlook from both S&P and Fitch, the lowest investment grade among BRIC (Brazil, Russia, India and China) economies. If there is a further downgrade, India’s credit rating will drop to junk status.
Market-friendly budget announcements, however, may help boost sentiment.
“‘Stability’ and ‘Clarity’ are two buzzwords in the finance ministry, so we expect few changes to the tax regime. Social schemes will be merged and relaunched as big ones like the ‘Food Security Bill’,” Macquarie Capital Securities analysts Rakesh Arora and Abhijit Bhattacharya said in a note on 1 February.
“The whole stage has been set by the roadshows earlier this year and I am optimistic that he (finance minister) will deliver on the promises,” said Sanghavi of Ambit.
In January, Chidambaram held roadshows overseas to woo foreign investors and expressed optimism that India’s economy will to growth.