Foreign funds may increase their holdings of Indian equities as the nation’s central bank joins policy makers globally in easing monetary policy to support economic growth, according to Deutsche Bank AG.
The BSE benchmark index, Sensex, has rallied 14 per cent this year as offshore investors poured $7.2 billion into local stocks after inflation eased and the rupee jumped from a record low even as company profit growth slowed. Flows totalled $5 billion in February, the most since September 2010, data from the market regulator show.
The European Central Bank (ECB) yesterday allotted more loans to support banks than economists forecasts, helping the region’s stocks complete a three-month advance, the longest stretch in a year. The Reserve Bank of India has signaled readiness to pare funding costs after inflation slowed to a more than two-year low in January. RBI Governor D Subbarao reviews rates on March 15, the day before Finance Minister Pranab Mukherjee presents the budget for the next fiscal year.
“If the global risk appetite continues and you see India factors in the form of election results, credit policy and the budget going in the direction supporting Indian markets, then we would expect foreign flows to accelerate in the next couple of months,” Abhay Laijawala, head of research at Deutsche Equities India Pvt., said in an interview yesterday.
The Sensex may “overshoot” the bank’s target of 18,000 for the year if flows increase, he said. The estimate is 14 per cent lower than the brokerage’s 2011 target of 21,000.
Two-month rally
The Sensex dropped 1.1 per cent to 17,566.17 at 12:30 p.m. Mumbai time. The gauge added 3.3 per cent in February, posting two straight monthly gains for the first time since September 2010. CLSA Asia Pacific Markets February 21 raised its index target for the year ending March 2013 to 20,800. The Sensex trades at 15.5 times future profit, down from 19 times at the end of 2010.
The Stoxx Europe 600 Index climbed 3.9 per cent last month. The Dow Jones Industrial Average closed above 13,000 for the first time since 2008 on February 28, while the Standard & Poor’s 500 Index had a 4.1 per cent gain in February. Oil traded in New York had its first monthly advance in three.
“Global central banks are flooding markets with liquidity in their quest to prevent systemic risk and this is manifesting in risky assets all over the world moving up,” said Laijawala.
The Frankfurt-based ECB allotted euro 529.5 billion ($712 billion) in three-year funds to 800 banks. Economists predicted euro 470 billion, a Bloomberg survey showed. The first tender saw banks borrow euro 489 billion in December.
‘Danger zone’
Asian officials are striving to weather the impact of Europe’s debt crisis on the world economy, which remains in “the danger zone,” according to International Monetary Fund Managing Director Christine Lagarde. Growth slowed last quarter in nations such as China and South Korea as exports moderated. India’s economy grew 6.1 per cent last quarter, the slowest pace since 2009, adding pressure on the central bank to lower rates, government data showed yesterday.
Indian inflation eased to a 26-month low of 6.55 per cent in January, after staying above nine per cent for most of 2011. It remains the fastest in the so-called BRIC group that includes Brazil, Russia and China. Credit Suisse Group AG predicts the Reserve Bank will reduce rates by 175 basis points by January 2013. The central bank in January cut banks’ reserve ratios for the first time since 2009, seeking to ease a cash squeeze.
“While it is not our base case scenario, the sharp deceleration in capital formation increases the probability of a cut in the repurchase rate in March,” said Laijawala, ahead of an investor conference next week that has Reserve Bank of India Deputy Governor Subir Gokarn among speakers. “Liquidity will remain reasonably tight” ahead of the state elections and advance tax payments, he said.
Energy costs
Regional elections are under way in five states, including the most-populous Uttar Pradesh, with counting set to end on March 6. The northern state, with 200 million people, is the nation’s biggest political prize, electing about a seventh of the 545 lawmakers in parliament’s lower house.
Higher oil prices may not curb the rally in Indian stocks, said Laijawala. Crude climbed to a nine-month high on February 24, raising costs for consumers and companies in the nation, which imports three-quarters of its energy needs.
“The Sensex and oil tend to move in a similar direction because both are linked to higher risk appetite,” he said. “If oil prices move up on account of geopolitical risk, that will have a negative impact on the market and India. If we are in an environment of rising global risk appetite, like we are currently, the market for that period will choose to ignore the higher oil prices.”
