Markets down -2.34 per cent on inflation worries

The Sensex ended last Friday at 16,719,down (-)2.34 per cent compared to its closing level at the end of the previous week.

The Sensex ended last Friday at 16,719,down (-)2.34 per cent compared to its closing level at the end of the previous week. It is currently trading at a 12-month trailing price to earnings (PE) ratio of 21.42. Foreign institutional investors (FIIs) invested Rs 980.3 crore in Indian equities last week.

According to Ashish Kapur,chief executive officer,Invest Shoppe India,The main reason why the markets fell last week was that domestic inflation is rising. This is leading to fears in the markets that the Reserve Bank of India (RBI) could hike interest rates. If inflation remains high,this would leave less disposable income in the hands of consumers,which would affect demand. Besides the inflation factor,the weakening of global markets also had an impact on sentiments in the Indian markets.

On the sectoral front,the two sectors that showed the maximum gains were healthcare (up 3.77 per cent) and IT (up 3 per cent). Says Kapur: Over the last two-and-a-half years pharma companies have not performed well. Now their outlook has turned positive. Since they have been operating on a low base,they have substantial scope for growth. As for the IT sector,he says: Worldwide financial institutions are restructuring their operations. A lot of new software,software-related services,and back-end operations will be required. India is likely to benefit from the outsourcing of these activities. In the last few years a number of Indian software companies have become globally competitive. They are likely to get a lot of this work. Besides,the large IT companies have excess cash. IT companies are also not affected by rising interest rates or inflation. Moreover,the dollar has begun to strengthen. This will benefit IT companies which receive their revenues in dollars.

The biggest laggards last week were banking (which fell – 5.57 per cent) and realty (which fell – 5.46 per cent). According to Kapur,The banking sector is most affected by a rise in interest rates as its margins get hit. While it has to raise deposit rates,it is unable to raise loan rates as quickly for fear that it would affect loan offtake. A possible rise in interest rates also affects the realty sector which depends heavily on home loans.

Some of the major events last week were the jump in WPI inflation (to 4.78 per cent) and the strengthening of the US dollar. If the dollar is strengthening,it indicates that risk appetite is once again waning. With US jobless claims rising,international markets were edgy. The proposal to extend market hours in India produced negative reactions from brokers as it would have meant a much longer workday for them.

Next week the RBI governor is scheduled to meet the finance minister. If this leads to monetary tightening in the form of a hike in the cash reserve ratio (CRR),it would be negative for the banking sector which would be left with less money to lend. Next week data on housing sales in the US will come out. This will provide an inkling into whether that market is recovering.