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A sharp drop in crude oil prices has led to a sudden splurge of bad news. Commodity prices globally are falling, interest rates in most part of developed world are near zero, growth forecasts are being reduced and, most importantly, China is showing no signs of improvement.
While these bits of news have been around for some time now, they were restricted to the inside pages. But falling oil prices and the corresponding fall in markets has brought them front and centre. A slowing world market is bad news for India. According to a Credit Suisse report on market strategy report nearly 55% of sales of Nifty companies are in foreign currency.
In India, economic data does not show any signs of pick-up. The latest IIP data showing a contraction of 4.2% was surprising enough to shake the government, let alone the market. But what has surely woken the government up is the state of the markets. The sharp fall in equities has resulted in government postponing its divestment plan. But for a fall in crude price which has helped the government reduce its twin deficits, this year would have been a washout.
As far as the markets are concerned, the biggest shocker has come from pre-results guidance given by software giant TCS. India’s largest company by market-cap has expressed caution over possible weakness in revenue growth. The company told analysts that its growth will be similar to that posted last year, which was 2%. However, this year’s cross-currency impact on its revenue will be to the extent of 220 basis points.
More importantly is the story beyond the numbers. TCS pointed out that banking, financial services and insurance sector (BFSI) continue to show weakness. These are the main sectors which have driven growth in IT space over the last few years. If TCS, the market leader in terms of size and growth rate among the leaders will be affected by these sectors, other smaller companies too will have to take it on the chin.
After touching a high of 28822, BSE Sensex is presently trading at 27,294, a drop of only 5% from its peak. But what is more worrying than the fall in equity markets is the weakening currency. Rupee has touched a nine-month low of 62.7350 on year-end dollar demand. A weak WPI inflation number has resulted in a rise in 10 year bond yields to a 17 month high of 7.80%. Higher probability of an interest rate reduction has further weakened the currency market. A weak currency has historically been a bad sign for Indian equity markets.
All indications are that the tides have turned, at least temporarily, for Indian markets as we enter a phase where FII activity slows down.
