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Volatile Rupee, Earnings Downgrades Pose Risks to India, CLSA’s Wood Says

A volatile rupee and downgrades in earnings estimates are the biggest risks to Indian equities amid a slowdown in the nation’s economic growth, according to CLSA Asia-Pacific Markets equity strategist Christopher Wood.

“On a three-to-six month view, the biggest risks are earnings downgrades, a further pick-up in non-performing loans and currency volatility,” he said in an interview to Bloomberg UTV in Gurgaon, near New Delhi, today.

The BSE India Sensitive Index has slumped 17 percent this year on concern rising inflation and interest rates may erode company profits amid the global slowdown. A government report last week showed industrial production in September grew at the slowest pace in two years, and Moody’s Investors Service cut the outlook for Indian banks to negative on concern domestic slowdown may trigger more defaults.

In August, CLSA reduced its target on the Sensex to 18,200 from 19,500, citing “faster slowdown of growth” and increased earnings downgrade. The gauge fell for a third day, losing 0.4 percent to 17,118.74 at the 3:30 p.m. close in Mumbai.

Eleven out of 28, or 39 percent of the Sensex companies that reported earnings for the September quarter have lagged behind estimates, compared with 47 percent in the three months ended June, data compiled by Bloomberg show.

India’s rupee has slumped 11.3 percent this year on signs Europe’s debt crisis is slowing growth in Asia’s third-largest economy. The central bank on Oct. 25 predicted the economy will grow 7.6 percent in the year ending March 31, lower than the 8 percent it estimated previously. It has raised borrowing costs 13 times since mid-March 2010 to tame inflation that has stayed above 9 percent since December.

Fund Flows

“The Indian currency has been relatively weak,” said Wood. “If we get some negative volatility on the rupee that will raise a question mark on corporates that have access to deep dollar borrowings.”

Still, foreign funds, who withdrew $2.4 billion in August, the most since October 2008, have been net buyers of domestic equities for 11 sessions ended Nov. 11, the longest such run in four months, data on the website of the regulator show. Inflows from abroad reached a record $29.4 billion in 2010.

“I have been amazed by the lack of foreign selling given that they put a huge amount of money last year,” said Wood. “The Reserve Bank is at the end of its tightening cycle. Hopefully foreigners won’t sell out of India.”

While Asian stocks rose today on optimism new governments in Greece and Italy will help contain Europe’s debt crisis, the “negative newsflow” from the region may continue, he said.

“We can get one to two months reprieve from risk aversion if Italy’s new government takes meaningful measures,” said Wood. “But such a rally doesn’t mean the end of the Euro zone crisis.” Indian and Chinese stocks will “outperform from the bottom after the Euro quake hits its crisis point,” he said.

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editors responsible for this story: Ravil Shirodkar at rshirodkar@bloomberg.net; Darren Boey at dboey@bloomberg.net

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