Waiting for the FM's <i>pathajatra</i> effect

Last week's uptrend looks too shaky to be sustainable, so it's best to stay cautiously optimistic

Historians prefer not to offer definitive judgement on any event until a decent interval of time has passed. This caution can be carried to extremes sometimes, as when Zhou Enlai remarked circa 1973 that it was "too soon to judge the effect of the French Revolution [of 1789]".

It will, however, be possible to gauge the utility of finance minister's "pathajatras" very soon from a historical perspective. P Chidambaram took charge of the finance portfolio in August 2012, when India was on the brink of a sovereign rating downgrade.

Chidambaram has conducted umpteen road shows, wandering across the globe to drum up foreign investment in the midst of the worst financial strife India has faced in 22 years. There will certainly be a drawdown of Indian reserves in the first half of 2013-14 since the road shows are unlikely to attract meaningful sums in a meaningful time frame. So, this is more a public relations effort, rather than a concrete marketing initiative. But it will have worked if it wards off a crisis in 2013-14. (Click for table & chart)
 

The numbers are frankly worse now, than when Chidambaram assumed office. The trade gap has hit $190 billion for 2012-13. The current account deficit is likely to reach about five percent of the gross domestic product (GDP) and the fiscal deficit is just south of 5.5 per cent. Exports declined in 2012-13. Foreign direct investment (FDI) dropped to just under $31 billion between April 2012-January 2013, This was a decadal low that coincided with a decadal low in GDP growth.

India has $260 billion in reserves, excluding bullion and the International Monetary Fund's special drawing rights. External obligations are $376 billion. Between $90 billion and $100 billion is to be repaid in the next 12 months. If FDI inflows slide some more in 2013-14 and portfolio investors also sell, the rupee will be toasted, if not roasted.

The finance minister's primary purpose, therefore, is to shore up confidence. It is a tough job asking investors to invest in infrastructure at this instant. Lakhs of crores are stuck in stalled projects. The road building programme has averaged a glorious two km a day in 2012-13. The power sector remains a mess and telecom is also a mess. There are no concrete solutions to bottlenecks that have persisted for years and political instability is increasingly a concern.

However, the recent past offers some hope. Exports picked up a bit in March. If crude prices stabilise at lower levels and the bearish trend in gold persists, this will take some pressure off the trade account.

On the domestic front, the Index of Industrial Production (IIP) was apparently positive in February. Inflation as measured by the wholesale price index (WPI) apparently dropped to its lowest levels since late 2009, although the consumer price indices stayed above 10.3 per cent. There are puzzling contradictions in IIP and WPI data, which means one has reservations about accepting these at face value. Nevertheless, the inflation trend is probably down, giving the Reserve Bank of India leeway to cut rates in May.

The first noteworthy effect of the full-year earnings season has been a bounce in index levels. The Nifty is up over four per cent in the past 10 sessions and it has risen above its own 200 Day Moving Averages, or DMA. This rally seems speculative. It has come on low volumes and without institutional support. The foreign institutional investors (FIIs) are barely net-positive and the domestic institutions, net-negative. The price rise, therefore, has been driven by operators.

FIIs going risk-on depend on events elsewhere. In the past fortnight, European markets saw some decline on the back of weak German economic data and continuing currency fears. The Nikkei continued its stunning 2013 performance as the yen weakened, according to plan. Sentiment in the US is slightly positive. However, there are worries about slower Chinese growth. This has hit commodity prices and there are rumblings about possible stresses in the Chinese banking sector.

Domestically, early bird results suggest that there has been an implicit downgrade of the infotech sector. Infosys delivered poor results and guidance, but the response of a 20 per cent sell off in one session was a shocker. Tata Consultancy Services hit consensus estimates and saw share price falling. HCL Technologies beat consensus by a big margin and still saw its share price falling. The Wipro results are not comparable owing to restructuring, but the share performance of the big three suggests investors are assigning lower valuation multiples to information technology stocks in general.

Not enough has come in from other sectors to be clear about many trends. Auto performances are bound to be down on the basis of falling unit sales. Capital goods are also likely to be hurting. Reliance Industries saw profits rise on better refining margins. This effect should probably be visible (to much lesser extent) with oil and gas public sector undertakings (PSUs). The renegotiation of KG-D6 gas pricing is also in progress and markets will watch that process with interest.

Perhaps, the best indicator of overall corporate health will be the net non-performing assets (NPA) and gross NPAs across banking, especially in PSU banks. Given the number of sticky loans and the mass of restructuring requests through the fourth quarter, a rebound in the financial sector would suggest that the economy has bottomed, if not turned the corner.

Technically, the uptrend looks shaky. There is massive resistance above current index levels. Operators cannot generate the kind of buying power required to push past 5,900. If the FIIs don't pump some money in over the next two weeks, the Nifty is likely to slide back till the 5,600 mark or even lower. The bullish drivers could be FII resurgence or a big policy rate that changes domestic investor sentiment. My attitude would be cautiously pessimistic in the transition to the May settlement.