After topping the charts till mid-February, Indian shares have been underperforming most world markets, as high crude oil prices, disappointing domestic events in March and tax uncertainty among foreign investors have dented sentiment.
The National Stock Exchange (NSE) benchmark, the Nifty, was the best performing index among major world markets till February 21 this year and had gained 21.25 per cent. However, since then, the 50-stock index has fallen 6.49 per cent till Tuesday, the worst performer among major world markets.
With this underperformance, Indian shares have been lagging emerging markets like Brazil, Indonesia and Philippines and developed markets like Japan and Germany this year till Tuesday.
Inflows from foreign institutional investors (FIIs), a key driver of Indian shares, have slowed in this month despite strong global liquidity thanks to European Central Bank’s $1.3-trillion Long-Term Refinancing Operations (LTROs).
After investing $5.13 billion in February, FIIs have put $1.75 billion into Indian shares in this month so far, a clear indication of reduced interest among overseas investors.
“Whilst money is still flowing into global emerging market funds, with the rise in crude prices there has been a recent shift in flows from oil users (including India) to oil producers (Russia etc),” said Nick Paulson-Ellis, country head, Espirito Santo Securities (India).
Brent crude, quoting at around $125 a barrel on Tuesday, has risen 17 per cent so far this year on concerns over potential supply disruptions from Iran. Rising crude oil prices stoke inflation and increase subsidy burden for India, which imports three-quarters of its oil requirements.
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The three key domestic events in March – outcome of UP elections, RBI mid-quarter review and the Union Budget – have also disappointed investors, capping the upside for the Indian markets.
“RBI has little wriggle room on rates though it should still make the first cut in April, the UP elections were disappointing for Congress and further illustrated the rise of regional parties and the likelihood of difficult coalition management, and the Budget was safe but unspectacular. Whilst overall fiscal consolidation looks credible, there is a big risk on subsidies and one-off asset sales,” Paulson-Ellis said. “All these are India specific problems which make investors nervous and aren’t going away any time soon.”
Media reports about a controller and Auditor General’s (CAG) draft report estimating loss of up to $210 billion in revenue due to selling coalfields too cheaply and tax uncertainty among foreign investors on account of General Anti-Avoidance Rules (GAAR) has also hurt investors’ sentiment, according to Paulson-Ellis.
| LOSING CHARM | ||||
| Index (Country) | Mar 27, 2012 | Change ( %) | ||
| Dec 31 To 21-Feb | Feb 21 To Mar 27 | Year to date | ||
| Nikkei (Japan) | 10,255.15 | 11.92 | 8.37 | 21.29 |
| S&P 500 (US)* | 1,416.51 | 8.32 | 3.99 | 12.64 |
| Psei ( Philippines) | 5,078.10 | 12.10 | 3.61 | 16.15 |
| Dax (Germany)# | 7,114.56 | 17.12 | 2.99 | 20.62 |
| Jakarta Comp (Indonesia) | 4,079.38 | 4.73 | 1.91 | 6.73 |
| Cac 40 (France)# | 3,503.09 | 9.67 | 1.09 | 10.86 |
| Kospi ( South Korea) | 2,039.76 | 10.87 | 0.77 | 11.72 |
| Bovespa (Brazil)* | 66,684.59 | 16.65 | 0.73 | 17.50 |
| FTSE 100 (UK)# | 5,899.32 | 6.39 | -0.49 | 5.87 |
| Shanghai SE (China) | 2,347.18 | 8.28 | -1.44 | 6.72 |
| Hang Seng (Hong kong) | 21,046.91 | 16.51 | -2.01 | 14.17 |
| Nifty (India) | 5,243.15 | 21.25 | -6.49 | 13.38 |
| *As on March 26; # as on 1740 hrs IST Source Bloomberg; Compiled by BS Research Bureau | ||||
The rupee’s depreciation against the US dollar is also dampening the mood. The Indian currency, which last closed at 50.71 against the greenback, has depreciated about three per cent since February 21.
“Other emerging markets face similar problems in India. The cost pressures on corporate margins are a common factor as are high oil prices. Where India diverges from the other BRIC (Brazil, Russia, India and China) markets is the weaker currency aspect, which is driven by over-reliance on short-term capital inflows to fund the current account deficit,” said Arjuna Mahendran, Singapore-based head of investment strategy for Asia, HSBC Private Bank. “This is why maintaining confidence among portfolio investors is vital to engender capital inflows. The government policy to attract more stable foreign direct investment flows is a paramount need to stabilise the currency,” he added.