The FINANCIAL — Equity investors in India should get a shot in the arm from the signs of a pick-up in the US economy and concerted moves by Western central banks to throw a lifeline to European banks struggling with the Eurozone debt crisis.
This is because any improvement in global risk appetite could mean a revival in foreign portfolio investment, which is the power-engine for the more than $1 trillion domestic stock market.
Even after pulling off the biggest weekly gain in nearly two and a half years, the widely-tracked Sensex is still one of the worst performing world indices this year — largely due to net foreign fund outflows of about $190 million since the start of January, compared with record inflows of $29.4 billion in 2010.For foreign investors a sharp depreciation in the rupee will make buying Indian shares even more attractive, he said.
The US jobless rate fell to its lowest in two and a half years in November, data on Friday showed, signalling the world's largest economy is getting back on track. Its manufacturing sector also regained momentum last month.
The US is the biggest market for Indian software services exporters such as Tata Consultancy Services, Infosys and Wipro. A stronger US economy will also boost demand for manufactured products from Indian companies that are increasingly looking overseas to beat a domestic slowdown in growth.The top-30 Sensex leapt 7.3 per cent last week, its first weekly rise since Oct-ober and the biggest gain since July 2009, to 16,846.83 on hopes the measures by six central banks led by the US Federal Reserve and the European Central Bank to make available ample liquidity would help ease the strain on the global fin-ancial sector.
There are also hopes the Reserve Bank of India, which has been the world's most aggressive central bank to tighten policy to fight high inflation, will begin to unwind some of the moves.
For a start, the RBI is likely to cut the cash reserve ratio — the percentage of deposits that commercial banks must keep with the central bank – at its scheduled policy on December 16. The move, if done, would give banks more cash to give as loans and earn better returns.
It is also expected to pause after raising interest rates 13 times — the last in October — since early 2010. The sharp increase in borrowing costs has squeezed consumer spending, investments in new projects by companies and hurt corporate earnings and overall economic growth.Data last week showed the $1.6 trillion economy expanded at its slowest pace in more than two years in the September quarter. Gross domestic product growth slipped to 6.9 per cent in the second quarter of the financial year from 7.7 per cent in the previous three months.
Manufacturing, which contributes 16 per cent of GDP, grew only 2.7 per cent, while mining contracted 2.9 per cent.
The economy is expected to pick up in the March quarter, Kaushik Basu, the chief economic adviser to the finance ministry, said.
Cititgroup said despite structural snags like inflation and the economic slowdown, the Indian stock market was relatively attractive.
The report, written before the market rallied for a third day on Friday, forecast the Sensex to reach 18,400 points by next December. The index is down about 18 per cent so far this year.
Citigroup said it was overweight on banks and autos, relatively defensive on telecom and pharmaceutical sectors, and underweight on materials, information technology, utilities and consumer stocks.