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Apr 12, 2012 10:21 PM IST | Source:

Friday the 13: Will inflation, Infosys nos move market tom?

Growth concerns are what are keeping Indian investors in check as they try and deal with a faltering economy and hold-ups on issues like FDI.

“The investor of today does not profit from yesterday's growth”
~Warren Buffett

Growth concerns are what are keeping Indian investors in check as they try and deal with a faltering economy and hold-ups on issues like foreign direct investment (FDI). The uncertainty surrounding taxation of foreign investors is also adding to this lack of confidence that the market is witnessing.

Investors bit back a sigh of relief today. Ved Prakash Chaturvedi of L&T Finance Holdings says the fact that the slowdown now seems to more emphatic will mean that there will be more incentive to focus on growth rather than inflation.

So, another tumultuous session saw the Sensex rise 132 points or 0.77% to close at 17,332.62 while the Nifty index advanced 50 points to close at 5,276.85.

FII flows have remained a question mark over the last few days and the market has seen some money flowing out of the system. Chaturvedi doesn’t see a runaway rally on the cards for the moment and expects the market to remain in a trading band. “At the same time the downside will be limited because valuations are not stretched and clearly there is some flow of money still happening into our market,” he adds.

February IIP Drags

The Sensex shed some gains midday after posting lower than expected industrial output data for February and which saw a revision in the January data. The Index of Industrial Production (IIP) came in at 4.1% for February.

Growth was dampened by a weakness in demand for consumer goods and exports and high interest rates. However, the much needed growth was seen in mining and capital goods sectors.

Unpredictable, that’s the word coming from David Pezarkar, Head - Equity, Daiwa Mutual Fund on the IIP numbers. He says if one looks at the three month average, then it appears that the intermediate goods are sort of bottoming out. “If you look at the OECD composite leading indicators, they also indicate that the Indian economic cycle looks as if there is some sort of a bottoming out kind of process.”

Can The RBI Get Bold With Its Rate Cut?

As the Centre withers away on pending policies, the market’s best hope is that the Reserve Bank of India (RBI) comes to the rescue come April 17. India's GDP grew at a 6.1% annual rate in the December quarter, the slowest pace in nearly three years. Inflation remains at 7% and the trade deficit is more than 9% of GDP.

A Reuter’s poll expects the central bank to cut rates by 25 basis points for the first time in three years on April 17, but expects only an additional 50 basis points cut through the remainder of fiscal 2013. According to the report, the effect of the expected 25 basis point cut in the policy repo rate to 8.25% can only by symbolic. To really shake up the economy, the RBI should make a much bolder move.

Also Read: IIP may rise; RBI to spread rate-cuts: Rashesh Shah

Pezarkar says that if the RBI were to take a bold step and go for a 50 basis point kind of a cut, it might lead to positive sentiment in the market.

The recent surge in crude is another important factor bound to keep the RBI concerned about inflation, given that India is the world's fourth biggest consumer and imports almost 70% of the black gold.

Market expectations are also riding high ahead of tomorrow’s two key events -

- Inflation numbers based on the wholesale price index (WPI) for March 2012 will be unveiled. (The annual rate of inflation based on monthly WPI stood at 6.95% (provisional) for the month of February, 2012 YoY as compared to 6.55% (provisional) for the previous month and 9.54% during the corresponding month of the previous year.

- The fourth quarter corporate earnings season begins with Infosys announcing its results and guidance.

IT Companies To Guide Up or Down?

Brokerage houses expect Infosys to post a 2-4% fall in quarterly net profit while a CNBC-TV18 poll of analysts too indicated a decline of 3.4% in profit of the company.

Sandeep Muthangi, vice president of research at IIFL Institutional Equities sees IT companies giving a muted EPS guidance for FY13 due to high uncertainty surrounding the sector. “IT players will have weaker growth QoQ, and my estimate is 3% growth in revenues for leading IT vendors,” he says.

Given the kind of uncertain environment that the IT industry is dealing with and with all the rumours swirling around in the market with respect to earnings guidance, interest rates, growth rates, Chaturvedi says such events will intensify this concern. “I don’t think it will be positive and will be a sentiment dampener as far as the market is concerned.”

Chelsea Saldanha

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