Better-than-expected corporate earnings helped Indian shares stretch their run of gains to a third successive week, after investors were jolted when the central bank belied market hopes for a reduction in borrowing costs and kept interest rates unchanged and sounded an end to its “accommodative” stance.
Over the next few weeks fund managers and market participants would be closely watching elections to local legislatures in five states that would determine whether New Delhi would be able to aggressively push ahead with reforms that are needed to accelerate growth in the nation of more than 1.3 billion people.
Voting began on Saturday in staggered polls in the crucial state of Uttar Pradesh, home to almost 224 million people — more than the combined population of Germany, the United Kingdom, France and Belgium. The northern state contributes the single-largest number of seats to the central legislature, and Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) had swept most of them in the national polls in 2014.
The BJP, however, faces an uphill battle against an incumbent regional party, which has tied up with the Congress party. The elections will be a litmus test for Modi’s crackdown on unaccounted cash hoards and corruption, but the move last November to scrap high-value bank notes that comprised 86 per cent of the currency in circulation caused hardships to every citizen, particularly the poor, farmers and daily wage earners — all vital voters.
Modi must win Uttar Pradesh to ensure any semblance of gaining control of the Rajya Sabha, the upper house of parliament in New Delhi where the opposition rules the roost. Elections are also underway in four other states, Punjab, Goa, Uttarakhand and Manipur, and the results of all would be released only by mid-March.
“The next big event for markets is the state elections,” said equity salesman Mehul Dalal. “The outcome will have a big say in the policy direction: A victory for Modi will steady the ship in these troubled times, but a loss will pave the way for uncertainty and populism.”
Upbeat results
State Bank of India, the country’s largest lender, more than doubled its profit for the December quarter as its provisions dropped for bad loans, in a sign of greater control over non-performing assets that have plagued the banking sector. It was the first rise in quarterly profits since the three months ended September 2015.
Shares in SBI, which accounts for more than a fifth of India’s banking assets, have rallied 10.6 per cent since the start of January after falling almost a fifth over the previous two years.
Bank of Baroda, the second-largest state-controlled lender, posted a quarterly profit compared with a massive loss in the same period a year earlier. Bank of India, the sixth-biggest lender by assets, reported its second consecutive quarter of profit after a stretch of losses.
Mahindra & Mahindra, the leading maker of utility vehicles, rode on high-margin tractor sales to lift October-December profit by a third. “Demonetisation affected rural and semi-urban spending but we still saw only a single-digit drop in revenue,” Chief Financial Officer V.S. Parthasarathy said.
Tata Steel beat market forecasts with a consolidated net profit of Rs. 2.32 billion for the December quarter, compared with a net loss of Rs. 27.48 billion in the same period a year earlier, boosted by a 14 per cent jump in revenue to Rs. 293.92 billion.
“Tata Steel recorded strong sales this quarter as the strength of our franchise helped us counter headwinds due to demonetisation,” T.V. Narendran, managing director for India and South East Asia, said in a statement. The company, which has a big operation in Europe, said its UK subsidiary has reached an agreement with trade unions to progress towards closing a pension scheme.
RBI turns hawkish
The Reserve Bank of India (RBI) stunned economists and markets alike by shifting its policy stance to “neutral” from “accommodative”, citing global headwinds from rising prices of oil, India’s single biggest import commodity, protectionist barriers threatening trade as well as domestic pressures on food items.
Firming US interest rates and outflow of funds, which has pulled down the rupee by two per cent this year, also influenced the unanimous decision of the Monetary Policy Committee (MPC) of the central bank to hold rates. “The decision of the MPC is consistent with a neutral stance of monetary policy,” the RBI said in a statement and added that it would help achieve an inflation target of 4 per cent in the medium term.
The central bank lowered its gross-valued added growth projection to 6.9 per cent from downwardly revised 7.1 per cent for the year ending on March 31, but said the economy would “recover sharply” in the next financial year — highly debatable for most economists.
“The commentary is in line with the decision they have taken but it is probably not in sync with the reality,” Anjali Verma, an economist for PhillipCapital India, said.
The Economic Survey presented by the government to parliament a week earlier had forecast GDP growth may slow to 6.5 per cent in 2016-17 from 7.9 per cent the previous year.
The RBI kept the repo rate unchanged at 6.25 per cent, disappointing market consensus for a 25 basis points cut after inflation fell to a two-year low of 3.4 per cent in December.
“While the decision to stay on hold might not have surprised the market that much, the shift to neutral from accommodative was a big surprise,” said Anubhuti Sahay, the head of South Asia economic research at Standard Chartered Bank.
Rates outlook
The central bank’s shift in policy stance could mean an end to the easing cycle that began in January 2015 and resulted in 175 basis points reduction of the repo rate until October 2016. In the two policy meets since then, it has kept the rates steady and is likely to follow suit at the next review in April.
“We have pushed our next and final 25 bps repo rate cut to August from April, if a good monsoon assures moderate 4-5 per cent inflation as we expect,” Indranil Sengupta, India economist at Bank of America Merrill Lynch, said in a note.
Consumer price inflation for January, due on Monday, is expected to come in at around 3.2 per cent, the lowest since the index was launched five years ago. Data released after the market closed on Friday showed industrial output in December contracted 0.4 per cent — noticeably production of consumer durables tumbled 10.3 per cent, non-durables dropped 5 per cent and capital goods fell 3 per cent — all reflecting the severe cash crunch in the wake of demonetisation.
Keki Mistry, CEO of HDFC Bank, believes that companies are saddled with excess capacities and some of the budget proposals could spur faster growth, rather than rate cuts.
“To get the investment cycle going we have to go for higher capacity utilisation and that can only happen when consumption increases,” he told ET Now television channel. “If there is more money in the hands of people to spend coupled with public spending — which the budget has indicated in terms of capex — will create demand for goods, create income for people, create more consumption and lead to a faster capacity utilisation.”
The top-30 Sensex and the 50-share Nifty crawled up 0.6 per cent each over the week to Friday to 28,334.25 and 8,793.55, respectively. Grasim Industries rallied 7.1 per cent to Rs. 1,010.50 as global benchmark provider MSCI added the stock to its emerging markets index.
The writer is a journalist based in India.
