The FINANCIAL — Business confidence in India is sinking rapidly as high borrowing costs, falling corporate earnings and delays in government decision-making take a heavy toll on fickle investor sentiment.
Large foreign funds, the trendsetters for the country's stock market, have been giving a wide berth and there is little likelihood of a revival as the year winds down unless New Delhi wakes up from its slumber and takes the initiative to jump-start long-pending economic reforms.
Quarterly earnings from some companies such as tractor and utility vehicles leader Mahindra & Mahindra and truck and car maker Tata Motors stunned investors after they posted bigger-than-expected falls in profits — the result of high material costs, rising interest rates and foreign exchange losses.A study of 50 companies in the Nifty index by Credit Suisse showed profits fell for the first time in two years in the September quarter, despite sales rising by a fifth. "Profit after tax margins fared worse than operating margins due to significant non-operating forex losses, as well as continued sharp increases in interest costs," the Swiss investment bank said.
It said both operating and net margins for the companies dropped for the fourth quarter in a row and were at three-year lows.
The rupee fell 2.4 per cent last week in its biggest slide in eight weeks to its lowest in 32 months. The currency could well test its record low in the coming weeks because of the bleak outlook for inflows, a rising oil import bill and a widening trade deficit.
It has plunged more than 14.5 per cent since late July and is the worst performer among major currencies. The rupee ended at around 51.34 against the dollar on Friday after touching 51.41, not far from the all-time trough of 52.20 hit in early March 2009.
The sharp depreciation poses a big risk to companies with exposure to overseas debt or imports. Even export-driven firms have been caught unawares as they had hedged their earnings never expecting the rupee to slide so much.
Little doubt why investors are sulking. The top-30 Sensex shed 4.8 per cent last week, its biggest drop in three-and-an-half months, to 16,371.51 and Shah said it would slip below 16,000 this week.Foreign portfolio investors have bought equities worth $571 million so far this year, sharply down from the $29 billion they invested in 2010.
There is strong speculation in the media Prime Minister Manmohan Singh's cabinet would this week consider opening up the retail market to foreigners such as Wal-Mart and Carrefour and allow foreign airlines to invest in domestic carriers.
Shah said any move forward in this direction would revive foreign interest in the India story, halt the rupee's fall and help draw in investments to sustain growth and control prices of farm products through better supply management.
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