A World Of Gloom In Your Cup

DALAL Street may have learnt to live with nasty soundbytes from the Left, jitters in Wall Street and Tokyo, and even mysterious policymakers in China. But, the Reserve Bank of India, with its headquarters just a stone’s throw from Asia’s oldest bourse, is an animal that the Street is yet to figure out. On Monday, the BSE Sensex tanked 616.73 points — the second-largest single-day fall (in absolute terms) since May 11, when the index had shed over 800 points — as bulls panicked after RBI governor YV Reddy’s weekend booster dose to the cash reserve ratio (CRR) in his efforts to tame the runaway inflation in the economy.
The only question in the investor’s mind is: whether Mr Reddy is done with his seemingly endless rate hikes and money squeeze, or, will he push for at least one more hike? The market isn’t hopeful. Soon after trading began on Monday, the market slipped and the 30-share Sensex fell 5% to close at a near 6-month low of 12455.37. Clearly, the market never expected that the CRR and rate hike announced on Friday would come so soon. The 50-share Nifty index crashed 187.95 points to close at 3633.60. The main worry bothering the market watchers now is whether the upswing in interest rates that began late 2006 is likely to hurt demand in the
economy and thereby the bottomline of Corporate India.
FUNDS SKIP EMERGING MARKETS
FUND FLOWS to both developed and emerging markets have tapered down, even as investors were busy shifting their focus to relatively safe developed markets during January-March. During the period, equity funds saw net outflows of $1.67 billion from the emerging markets. Funds investing in developed markets also witnessed a sharp fall in net investments, to $18 billion in Q4 FY07 from $48-odd billion in Q4 FY06.

WHITHER REPORT
THE DOWNSIDES
Further rise in rates; surge in oil prices Possible slowdown in GDP growth Funds may lose faith in emerging markets.

THINGS TO WATCH OUT FOR
Q4 earnings; impact of rising Re on IT cos
Credit & monetary policy in April
ECB’s April meeting;
Fed meet in May

Frontline stocks suffer maximum damage
With rising interest rate the worry is whether this will hit the demand and, in turn, the corporate earnings? The January-March quarter numbers of leading companies could give some indicators in this direction. Key Asian markets ended slightly higher, showing that the fall in Indian equities was clearly triggered by local factors, i.e. the 50-basis point hike in CRR and 25-basis point hike in repo rates, that was announced after market hours on Friday. Much of the decline in stock prices since the start of the current calendar has been mainly due to international factors. The RBI had already raised the CRR by around 100 basis points since
December 2006.
As expected, sellers trained their guns on banking stocks, as the industry is likely to see its interest income dip by around Rs 2,000 crore due to the hike in CRR as well as the reduction in the interest that the RBI will pay on cash reserves. The BSE Bankex index fell around 6% to close at 6152.59. Automobile stocks were the other major casualties as a rise in interest rates is expected to affect demand for vehicles. Reflecting the grim mood in the sector, the BSE Auto index sheds 6% to close at 4569.91.
Among the prominent losers of the day, Maruti Udyog and Tata Motors fell 8% each, while State Bank of India, ICICI Bank and HDFC Bank were down around 5-6%. None of the other sectors fared any better, as the market fears that the government’s effort to jam the brakes on inflation may achieve the desired result, but only at the cost of growth. All the 30 stocks in the Sensex closed in the red. With this fall, benchmark indices are around 15% off their peaks seen less than two months ago.

“The market was completely unprepared for the hike (in CRR), though there had been signals,” said Ramesh Damani, BSE broker, who feels that the market is unlikely to recover in a hurry. “We are not yet in a bear market, but we are in for a bearish phase,” he said.
“The Sensex could move in a range between 12000-15000 for the next 2-3 months; unless interest rates show signs of easing, the market is likely to remain subdued,” he said. Technical analysts are hoping that the Sensex holds above 12300 — a level below which the index has not fallen since September 27, 2006, despite coming very close on a few occasions. Frontline stocks bore the brunt of the selling pressure on Monday. The BSE Mid cap and Small cap indices shed around 3%. “Second-line stocks have already been badly hammered since a long time now,“ pointed out a dealer at an institutional brokerage. While corporate earnings so far have
broadly matched market expectations, most analysts see high inflation as a major concern. This has led many brokerage houses to take a cautious view on the market.