Indian Market Strategy - India Outperforms

By Guneet Singh Sahni - Indian Market Analyst

India's BSE Sensex registered its fifth consecutive weekly gain, rising 511 points on the back of the drop in oil prices, short covering in the derivatives segment and positive global cues. The Sensex remained in positive territory throughout the week, but witnessed some profit-booking and finally closed at 15,167 with a gain of 3.5%. Strong buying was seen in interest rate sensitive industries like banking, autos and real estate, which lifted the indices up. Inflation at a new 13-year high is showing signs of peaking out, which the markets believe will hold the RBI from further increasing interest rates.

Mid-cap stocks also surged in this week's rally, on the back of bargain hunting in the recent meltdown. However metal stocks saw some profit booking on news that steel companies have agreed to hold prices at current levels. India’s WPI inflation increased to 12.02%, in-line with consensus estimates.

Article interests (AMEX: DIA, SPY, DOG, SDS, QLD), Nasdaq: QQQQ, NYSE: NYX, Nasdaq: ASIA, Nasdaq: PRASX, AMEX: PUA, AMEX: NWD, Nasdaq: MEAFX, Nasdaq: EBASX, Nasdaq: EVASX, Nasdaq: MACSX, Nasdaq: MATFX, AMEX: CZJ.

Top Gainers for the Week

The bulls remained in control for most of the trading sessions. BSE Bankex was the best performing index, by climbing 10% or 667 points to close at 7,395 points. Bankex has appreciated by 45% from its recent lows, outperforming the other indices. This was followed by the BSE Auto Index, which gained 8.6% or 314 points to close at 3,970; the index benefited from the fall in crude oil prices. Top gainers for the Sensex were Sterlite (NYSE: SLT) +4.43, Tata Motors (NYSE: TTM) +4.10%, HDFC (BOM:500180) +3.37%, HDFC Bank (NYSE: HDB) +3.03% and Grasim Industries (BOM:500300) +2.49%. Top losers included BHEL (BOM:600103) -2.88%, Bharti Airtel (BOM:532454) -2.25%, Rcom (BOM:532712) -1.78%, Ranbaxy (OTC: RBXLY) -1.68% and Hindustan Unilever Limited (BOM:500696) -1.47%.

Inflation showing signs of peaking off…

Wholesale prices surged to a 13-year high of 12.01%, in-line with consensus estimates for the week ended July 26. The relatively slower rise in WPI inflation numbers, as against 11.98% in the previous week, was on account of lower price increases in chemicals, textiles, metals, and specific primary items. Prices of most food items, including grains and vegetables, declined week-to-week showing signs of inflation peaking off from this level.

Looking at the components, primary articles were up 10.3%; manufactured products were up 10.8%; while the fuel price index was up 17.1%. Of the headline 12.01% WPI number, 6% is attributed to manufactured products; 3.7% to the fuel index, and 2.4% to primary articles.

Demand-side worries for inflation still remain

Even after continuous monetary policy tightening, the demand side pull on price levels is still there. Money supply (comprising currency in circulation, bank deposits and funds invested in other savings plans) is still above RBI's target, and grew 20% in the two weeks to July 18, from a year earlier.

Runaway inflation has forced the central bank to raise its year-end inflation target to 7% from 5.5%, and to lower its economic growth estimate for the year ending March 2009 to 8%, from an earlier prediction of 8%-8.5%.

Industrial Production expected to moderate after disappointing last two months of slowdown

June Industrial Production data is expected to fare better following weak numbers in May. Industrial production grew at the slowest pace in more than six years in May 2008, at 3.8%, as against 10.6% in the same month of 2007, with manufacturing showing signs of acute deceleration.

Industrial growth is expected to moderate in the medium-term, on the back of tightening monetary policy coupled with rising input costs.

Banks follow the race in raising Prime Lending rates after Central bank raises interest rates thrice in two months

Leading public sector lenders including Bank of India (BOM:532149), Canara Bank (BOM:532483), Bank of Baroda (BOM:532134) and Corporation Bank (BOM:532179), have increased their benchmark prime lending rate to 14%, while Dena Bank (BOM:532121) has raised its PLR to 14.25%. Public sector banks hiked their lending rates following the footsteps of ICICI Bank (NYSE: IBN) and Punjab National Bank (BOM:532461). ICICI Bank is India's largest private sector bank and Punjab National Bank is the second largest. These PLR hikes come in the aftermath of the Central Bank's quarterly monetary policy review, in which it hiked the cash reserve ratio and repo rate by 0.25% and 0.5%, respectively, to check inflation.

Outlook - Rally to continue on back of robust IIP numbers and cooling oil

We expect the bear market rally to continue if crude shows further signs of weakness, as India being a net importer of oil, gains the most from cooling oil prices. The Indian basket of crude oil has come down from its high of $143 per barrel to $115 per barrel. Also India's corporate earnings for the April-June quarter have withstood the slowdown, although companies have been affected by non-operating expenses like high interest costs and forex losses.

The government is planning to make it mandatory for iron ore companies to sign long-term supply contracts with steel companies, in order to curb high prices of raw-materials - which can help to contain the price spurt in steel products. While a drop in the prices of oil and commodities could boost sentiment, the industrial production report scheduled for release on Tuesday and the outcome of the SEBI meeting on Wednesday could influence market movement. This week, the market would have only four sessions due to the holiday on Friday for Independence Day.

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