y Geetha Bhaskaran, Special to Gulf News
Published: March 09, 2008, 00:03
Mumbai: There will be more pain ahead for Indian shares after plumbing
six-month lows last week, with a slump in US jobs indicating a worsening
crisis in the world's biggest market.
Although India's $1 trillion economy is mainly driven by domestic demand
and
is better placed to weather a US recession than other ex****t-powered
countries, it cannot escape some aftershocks.
"The market is like a cat caught on a hot tin roof," said equity trader
Kevin D'Souza. "It's very nervous and jittery."
Like last week when it was disclosed that ICICI Bank had taken a hit of
$264
million on its overseas investments in derivatives, following the market
turmoil caused by the US subprime woes.
ICICI, which is also listed on the New York Stock Exchange, said the
losses
were mainly "notional", meaning it was only writing down the value of the
investments based on the current market prices and insisted the quality of
the underlying asset - mostly Indian companies - was good.
But the damage was done. The write-down set off alarm bells about the
likely
exposure of other banks to such products. ICICI shares slumped 18.2 per
cent
last week to Rs892.75, their lowest close since about mid-September.
Sentiment for financial stocks also took a beating after the finance
minister advised state-run banks to lower interest rates on home loans for
up to Rs2 million, while fears mounted that a government plan to write off
$15 billion of farm loans may encourage other farmers to default on
repayments.
State Bank of India lost 12.7 per cent last week to Rs1,841.8, with the
slide hastened by Credit Suisse's decision to cut the stock to
"underperform" from "outperform". The Swiss brokerage also downgraded
Punjab
National Bank, Indian Overseas Bank, Union Bank of India and Bank of
India.
"Uncertainty will likely continue for at least two quarters until the loan
waiver is finalised," it said. "The risk perception associated with
agricultural lending for government banks has risen significantly."
Last week the Sen*** tumbled 9.1 per cent - its biggest weekly fall in
nearly two years - to 15,975.52. It was the lowest close since September
18,
when a US rate cut triggered more than $7 billion inflow in about seven
weeks to end-October and powered the index to an all-time high of
21,206.77
on January 10.
The index has lost nearly a quarter from that high and has sunk below its
200-day moving average, indicating a bearish trend, chartist Kanu Dave
said.
Worrying factor
"A worrying factor is the culmination of weak technical and fundamental
factors," he said. "It will be very difficult to pull back from this slide
because any recovery will be short-lived."
Strategist V. Venugopal said the fall in prices of many blue-chips have
made
them good bargains for long-term investors, especially in the context of a
slowing global economy and the prospect of at least 20 per cent growth in
cor****ate earnings in India.
However, market volatility will rise in the coming weeks as a wobbly US
economy, defaults and write-downs continue to rattle investors, driving
them
away from high-risk equities to the safety of bonds and bullion, he said.
Late on Friday, US payroll data for February showed a cut of 63,000 jobs,
the biggest monthly fall in five years. The data also revised upwards job
losses in January to 22,000 from 17,000 re****ted earlier.
"The data should reinforce expectations for another hefty US rate cut this
month," Venugopal said. "I wouldn't be surprised to see the rate at 2.25
per
cent from three per cent."
If this were to happen it would widen the spread between the US and
India's
main short-term lending of 7.75 per cent, and could encourage flows to
higher-yielding Indian assets. But the Reserve Bank of India (RBI) is
unlikely to follow suit and lower domestic rates, which have been held
steady for nearly a year.
RBI Governor Y.V. Reddy said on Friday fighting inflation was a bigger
priority than growth because spiralling prices hammered the poor
immediately
while the benefits of economic expansion took time to trickle down to the
lower strata of society.
India's annual inflation in late February shot above five per cent for the
first time in nine months, and analysts say the outlook is bleak because
of
rising oil and commodity prices.
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