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Indian Rate Concern May Cap Stock Gains, HSBC Asset Says

Indian stocks, poised to complete their first quarterly gain since December 2010, may have gains capped by concern the central bank will cut interest rates at a slower pace than expected, according to HSBC Asset Management (India) Pvt. and Birla Sun Life Asset Management Co.

Expectations for interest-rate cuts that helped fuel a 12 percent rally in the BSE India Sensitive Index this year have been tempered after Finance Minister Pranab Mukherjee projected record borrowing to plug a fiscal deficit, Mahesh Patil, co-chief investment officer at Birla Sun Life, India’s fourth-biggest money manager, told Bloomberg UTV yesterday.

The Sensitive Index, or Sensex, is poised for its biggest quarterly advance since the three months ended Sept. 30, 2010, as optimism the central bank will lower interest rates to spur economic growth prompted overseas funds to buy a net $9.1 billion of shares this year.

“Interest rates will come off, but the chronology in terms of how quickly they could have come down has been delayed,” Tushar Pradhan, who manages about $1 billion as the chief investment officer at HSBC, said in an interview at his Mumbai office yesterday. “The ramifications for the equity market are negative because higher interest rates mean lesser valuations.” He expects the rally to slow and forecasts a return of 15 percent to 20 percent for the whole year.

‘Be Cautious’

The Sensex rallied to a seven-month high on Feb. 21 as the central bank signaled it may start lowering borrowing costs after raising them a record 13 times from March 2010 to October last year. The stock gauge has fallen 7.4 percent since then and now trades for 15 times estimated profit. That’s still a 40 percent premium to the MSCI Emerging Markets Index’s 10.7 multiple, data compiled by Bloomberg show.

“We were expecting rate cuts to happen deeper and sharper, and now with the fiscal deficit being where it is, the expectations have moderated,” said Birla’s Patil, who oversees $12 billion. “Given the current environment, the domestic macros and global, one would be cautious at this point.”

Mukherjee projected on March 16 record borrowing of 5.69 trillion rupees ($111 billion) to finance a fiscal deficit estimated at 5.1 percent of gross domestic product in the year starting April 1. The Reserve Bank of India has flagged inflation risks from the shortfall, an oil-price surge and a weaker rupee, while signaling readiness to lower interest rates to bolster growth.

India’s economic growth slowed to 6.1 percent last quarter from a year earlier, the slowest pace in almost three years.

Inflation Risks

A surge in Brent crude, which has climbed 14 percent this year, poses “new risks” to prices in the world’s fourth-largest consumer of oil, the RBI said on March 22. The rupee is threatening to accelerate inflation as it heads for its first monthly decline since December. That boosts import costs for a nation that buys 80 percent of its oil overseas.

The RBI has less room to cut its benchmark interest rate, which currently stands at 8.5 percent, as surging oil prices push up inflation, swap markets show. The cost of locking in interest payments for five years rose 20 basis points this month to 7.59 percent, according to data compiled by Bloomberg.

“Market expectations have already come down from the 150 basis points of cuts that we started with in December,” Swati Kulkarni, who helps manage $11.3 billion at UTI Asset Management Co., India’s fifth-largest money-management company, said in an interview with Bloomberg UTV yesterday. “People were expecting that the whole year of 2012 could have that kind of cuts. Now people have reconciled to the fact that the cuts could be at best 50 basis points to 75 basis points.”

HSBC, Birla and UTI expect the indexes to trade in a range this year and recommend investing in specific companies rather than broad sectors.

“We would look to invest in big companies whose economic destinies are not dictated by either government action or a regulatory overhang,” HSBC’s Pradhan said.

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