Sensex advances 1.4% despite inflation numbers, Japan quake

Sensex advances 1.4% despite inflation numbers, Japan quake

Mumbai: Indian equities ended 1.46% higher on Monday in line with most other Asian peers, after an earthquake of magnitude 8.9 hit Japan on Friday causing a tsunami that devastated vast areas along the northern coast, besides bringing the country to the verge of nuclear catastrophe and knocking its stocks down steeply.

The Sensex, India’s bellwether equity index, rose 265 points to close at 18,439.48, shrugging off the earthquake as well as higher inflation numbers for February, but markets are unlikely to see a rally as long as macroeconomic uncertainties persist, analysts said.

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While the devastation wrought by the earthquake and tsunami in Japan may see its economy taking a hit in the short run before reconstruction begins, India is unlikely to be affected.

“I do not see a major impact on the Indian market," said Gopal Agarwal, head of equities at Mirae Asset Global Investments (India) Pvt. Ltd, which manages assets worth Rs328 crore.

At least two Sensex firms said on Monday that they don’t face any adverse impact from the Japanese quake.

R.C. Bhargava, chairman of Maruti Suzuki India Ltd, said supplies from parent Suzuki Motor Corp. haven’t been affected by the earthquake in Japan.

M.V. Kotwal, president of heavy engineering at capital goods bellwether Larsen and Toubro Ltd, said there was unlikely to be any impact on nuclear equipment orders because of meltdown fears at a Japanese nuclear plant.

Japan accounted for 2.4% of India’s total imports in the first half of fiscal 2011 and a large part of it was automobile components, said a 14 March note by Singapore-based Parul J. Saini, India strategist at the broking arm of Royal Bank of Scotland Plc.

The big concern is the impact on crude oil prices, since the fluctuation in crude oil prices has been a key driver of volatility in Indian indices.

Japan was the third largest consumer of oil and the second largest importer after the US in 2009, according to data from the US department of energy.

The switch from nuclear energy to other fuel sources to meet power requirements and reconstruction efforts is likely to raise the demand for oil, analysts said. At least 11 nuclear reactors were shut owing to damage caused by the earthquake and tsunami and operations have been stalled at three oil refineries, according to a 14 March report by Japanese investment bank Nomura Securities Co. Ltd.

“While it is still too early to say anything definite, oil usage is likely to go up as the use of nuclear energy comes down and reconstruction activity picks up," said Singapore-based Yingxi Yu, oil analyst at Barclays Capital, investment banking arm of Barclays Bank Plc. “Also, with refineries getting affected, oil supplies are likely to fall."

Brent crude was trading at $111 per barrel on Monday, down 2%.

Although reconstruction efforts tend to be favourable for oil and base metals, it is still too early to say how the impact on oil prices and Indian markets is going to pan out, said Apurva Shah, head of research at Prabhudas Lilladher Pvt. Ltd.

There are a lot of uncertainties relating to the prices of crude oil and commodities as well as the overall inflation, because of which markets are likely to remain volatile, Shah said.

Inflation in February inched up slightly to 8.3%. While food inflation has dipped, core or manufacturing inflation is up, prompting economists to argue for rate hikes by the Reserve Bank of India (RBI).

“Higher raw material costs were partly reflected in higher core inflation this month, but we do not think the pass-through is complete," wrote Sonal Verma, India economist at Nomura.

Typically, there is a lag of about three months between rise in global commodity prices and this is being reflected in manufacturing inflation, which suggests that manufactured price pressures are likely to remain high, Verma said.

“Inflation is just not coming down and continued RBI tightening is needed," said Leif Eskesen, Singapore-based India economist at The Hong Kong Shanghai Banking Corp. Ltd.

RBI is expected to hike policy rates in its review of monetary policy due on Thursday.

Graphic by Sandeep Bhatnagar/Mint