Mumbai: Indian equity markets steadied on Tuesday as some foreign analysts raised their target forecasts and speculators covered their short positions by buying at lower prices.
After falling nearly 6% on Monday on concerns of a fiscal deficit as high as 6.8% and an apparent lack of expected reforms, Bombay Stock Exchange’s benchmark index, the Sensex, gained 0.9% to close at 14,170.45. The broader Nifty index on the National Stock Exchange gained 0.88% to close at 4,202.15
“The Budget is discounted,” said Vetri Subramaniam, head of equity assets at Religare Asset Management Co. Pvt. Ltd. “What will now take centre stage are global cues and local cues such as the earnings season and monsoon.”
Stock taking: The BSE building in Mumbai. After falling nearly 6% on Monday, the Sensex on Tuesday gained 0.9% to close at 14,170.45. Madhu Kapparath / Mint
Global markets have been weak, too, as investors recognize that a quick economic recovery is not imminent; major regional stock indices are creeping down after quick gains earlier this year on hopes of an early recovery. On Tuesday, Tokyo’s Nikkei index closed 0.34% down, while Hong Kong’s Hang Seng index dropped 0.65%.
“Central governments are not willing to write more cheques and people are beginning to doubt recovery,” pointed out Vinod Kumar Sharma, who heads research at Anagram Stockbroking Ltd.
With risk aversion slowly returning among global investors, and valuations in India nearing long term averages, some fund managers such as Anoop Bhaskar, head of equity assets at UTI Asset Management Co. Pvt. Ltd, fear that foreign investors might start pulling out funds since the government has not shown much intent for reform. Foreign investors have invested $5.3 billion (Rs25,705 crore) in Indian equities since January.
On the domestic front, most Indian brokerages predict flat earnings for the fiscal ending March 2010. Monsoon, too, is forecast to be weak, further dampening the outlook.
However, some foreign brokerages remain optimistic. Australia’s Macquarie Group Ltd raised its April 2010 target for the 30- stock Sensex by 20%. With government expenditure crossing Rs10 trillion, analysts there say the Sensex may climb to 18,000 by April next year, helped in part by the government’s pro-growth Budget, Bloomberg reported on Monday.
In a report, Morgan Stanley India Co. Pvt. Ltd analysts Ridham Desai and Sheela Rathi said: “The fiscal stimulus, through a combination of tax cuts and spending, will assist growth recovery. Apart from small MAT (minimum alternate tax)-related negative earnings revisions, it is quite likely that earnings revisions will stay positive in the months ahead.”
Meanwhile, the rupee continued to track cues from the equity market, moving largely in sync with it. The currency strengthened as much as 48.20 to the dollar in early morning trade but slid once the Sensex started falling. By afternoon, it was trading at 48.75 a dollar before the Reserve Bank of India (RBI) started supplying dollars through a clutch of public sector banks. The currency closed at 48.45 a dollar, a bit stronger from Monday’s level of 48.56/59 a dollar.
The mood in the bond market also remained sombre, with bond dealers pushing the yield further up on heavy supply concerns. “Overall the sentiment is very dull. People who had bought at higher level before the Budget are buying bonds cheap now and trying to average out their costs,” said S.S. Raghavan, head of treasury at IDBI Gilts Ltd, a firm that trades in government bonds.
RBI, which also acts as the debt manager of the government, on Monday increased its weekly borrowing size to Rs15,000 crore from Rs8,000 crore. The government has stepped up its borrowing programme from Rs3.62 trillion to Rs4.51 trillion to bridge its fiscal deficit, which is projected to widen to 6.8% in fiscal 2010 from 6% in 2008-09. This has also convinced the bond market that the weekly issuance sizes will continue to rise for the rest of the year. Bond dealers are also looking forward to RBI’s open market operation, in which it purchases bonds from the secondary market.
RBI on Tuesday evening said it will purchase up to Rs7,500 crore of dated securities on Thursday from the secondary market. The three securities include the existing 10-year paper. RBI had earlier said it will introduce a new 10-year benchmark on Friday when it will auction Rs15,000 crore worth of a mixed bag of securities. Dealers expect RBI to step up its open market activities and buy more securities from the market.
So far this year, RBI has bought Rs43,159 crore from the market. On Thursday, RBI will conduct another open market operation before an auction on Friday where it will sell a new benchmark 10-year paper.
The present 10-year paper has turned illiquid after the government raised Rs53,000 crore against it. The yield on the benchmark 11-year paper closed at 7.30% from Monday’s 7.25%. According to bond dealers, the yield on the new 10-year paper will likely touch 7.5% in three months if there is not enough support from RBI or the government.
In the absence of any formal communication from RBI or the government, bond dealers are afraid of taking big positions in the market, a position compounded by lack of detail about the exact amount of extra borrowing. RBI has already transferred Rs28,000 crore of its intervention bonds to the government and has an outstanding Rs22,890 crore of such bonds. It has also not announced how much it will buy from the market directly. Also, dealers said they weren’t sure whether the extra Rs18,000 crore borrowed in the past six auctions was part of the total extra borrowing or not.
“Till the market gets clarity on the exact quantum of additional borrowing subsequent to the Budget and the magnitude of RBI support, market will lack direction in the short term,” said Joydeep Sen, senior vice-president, advisory desk of BNP Paribas Wealth Management.
“The interest rates are bound to go up as from September, the inflation will start to climb up because of the base effect of the last year. My hunch is that government will borrow 80% of the amount in the first half itself and leave the borrowing space for the corporations,” said Raghavan.
Bloomberg contributed to this story.