Keeping an Eye on India's Economy

The Mumbai-based Sensex Index has mirrored China and other Asia bourses with a 3.6% drop, and authorities are ready to curtail growth

Mar. 5 was another tough day on Asian bourses as stocks plunged across the region. Following further Wall Street losses on Mar. 2, at close of trading across Asia, only Vietnam's Ho Chi Minh index was higher. In Japan, the Nikkei 225 ended down 575 points, or 3.3%, to 16,642, after further appreciation of the yen sparked fears over exporter profits. The loss was the Nikkei's largest since June.

China's mainland bourses, meanwhile, were again among the region's poor performers. A week after triggering a global sell-off, another spate of selling sent the Shanghai & Shenzhen 300 Index, which tracks domestic currency stocks, down 1.3% after Beijing said it will take further action to cool an overheating economy (see, 3/5/07, "China Congress Puts People First"). The Shanghai and Shenzhen B stock indexes, which follow stocks reserved for foreigners, both lost more than 6%.

While the turmoil in the region's two largest economies is important, investors would also be wise to keep focused on India. Sure, China grabbed the headlines during last week's sell-offs, but in Monday trading, the Bombay Stock Exchange Sensitive Index (Sensex) of 30 leading Indian stocks closed down 3.6% to 12,415. Mumbai stocks have now fallen over 9.9% in the last week, slicing more than $30 billion off share values.

A Mirror to China

What's more, when the Sensex dips, it's more than sentiment that takes a pounding. Unlike in China, where foreign investors account for less than 1% of market capitalization on the Shanghai and Shenzhen markets, foreigners account for about 21% of market value on the Mumbai exchange.

The pain in Mumbai largely mirrors events elsewhere. Analysts note that the volatility of the last week reflected global events, not least the China meltdown on Feb. 27, which wiped 9%-plus off the Shanghai & Shenzhen 300 Index in a single day, and fears about the U.S. economy's health (see, 2/27/07, "A Rough Day for China Stocks").

But just as in China, there are clear signs that Indian authorities are ready to curtail some of their country's runaway growth. In January the Indian bank raised the cash reserve ratio—the proportion of total deposits that banks must deposit at India's central bank—by 50 basis points. That move is expected to absorb $3 billion from the banking system.

Tackling Inflation

In mid-February, Prime Minister Manmohan Singh wrote to 25 state ministers asking them to monitor prices of essential goods, and curb speculation and hoarding. And on Feb. 28, Finance Minister Palaniappan Chidambaram's budget speech included tough talk on controlling inflation.

Chidambaram proposed cuts in fuel taxes and industrial tariffs to rein in inflation, and increased spending on education and infrastructure aimed at tackling supply constraints. It's not too soon, says Deepak Parekh, chairman of HDFC, India's largest mortgage company, which began investing in infrastructure last fall. "There's a shortage of steel, cement, and labor," he says. That's one reason inflation touched a two-year high of 6.1% in January. Prices of real estate, manufactured goods, and essential commodities including vegetables, milk, and lentils are also rising at alarming rates.

Analysts say those domestic issues, stock market dips in China and on Wall Street, and a feeling that the Indian market had soared too high are sending the Mumbai bourse south. "There has been some discomfort due to the rapid rise of the [Sensex] Index in the recent past," says Jaganathan Niranjan, head investment banking at ICICI-Securities.

A Better Balance

Still, Mumbai market watchers reckon the current woes are likely to be temporary. That would be a repeat of last year when the Sensex jumped from around 9,000 to 14,000 despite a crash in late spring when the market fell 30%. "The demand for equities is still strong," says Munesh Khanna, a director at Halcyon Enterprises, a private equity firm in Mumbai.

Sandeep Sabharwal, chief investment officer at Mumbai-based JM Mutual Fund, adds he expects Indian companies to show profit growth of 18% to 20% this year. "In the long term, economic performance and corporate profits take over," he says.

Just as important, commentators sense India's authorities are getting broader economic policy measures about right. "The budget balanced political imperatives and economic compulsions," says Siddhartha Roy, economic adviser at Tata Group in Mumbai "It hasn't done anything adverse to derail the growth process."

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