The Bears in Action – Why is the Indian Stock Market Down?

By Priya Nigam

The sun has not been shining too brightly on Dalal Street recently. Monday witnessed a sharp downturn in shares, with broad-based selling. Heavyweights, like ICICI Bank Ltd, Reliance Industries Ltd, Infosys Technologies Ltd and Punj Lloyd Ltd, slid. This was not simply Monday blues! So, what is impacting the Indian share market?

1. Exports hit – The rupee rallied 12.3% in 2007, hurting the country’s exports. Growth in India's goods exports decelerated to 17.7% a month last year, from 21.2% in 2006. Exports have not only been hurt by the strong rupee, but also by the slowdown in the US, which is a huge market for India’s exporters. [A ray of hope comes from a CII (Confederation of Indian Industry) survey of CEOs, according to which India’s merchandise exports are expected to hit $200 billion in 2008-2009, representing an annual 30% jump.]

2. Weak domestic demand – The culprit is inflation. A surge in food, fuel and metal prices have pushed India’s inflation to alarmingly high levels. Inflation galloped to a 13-month high of 6.7% for the week ended March 15.

3. Interest rates – In the face of high inflation, it is unlikely that the central bank will cut interest rates. With no cut in interest rates, the rupee may appreciate further.

4. Economic growth versus inflation - Mr P. Chidambaram has already indicated (without mincing his words) that some growth may have to be sacrificed in order to contain inflation. The Finance Minister stated, “The Government is determined to take all steps - fiscal, monetary and supply side - to moderate inflation. If that means, we have to live with slightly lesser growth, so be it.”

5. The ICAI impact – The Institute of Chartered Accountants of India has issued an Accounting Standard, AS 30-Financial Instruments, detailing methods for accounting for derivatives. The ICAI has urged companies to reveal their mark to market (MTM) losses of all outstanding foreign currency derivative contracts for the fiscal year ending March 31, 2008. Currently, there is no regulatory requirement for companies to disclose their financial derivatives position. So, the ICAI guidelines have brought in a lot of apprehension about the upcoming reporting season. While the ICAI impact is positive, investors may still not be ready to deal with a clear perspective into the magnitude of MTM losses on the balance sheets of various companies. What a lot of investors may not understand is that MTM losses are not necessarily going to be booked or incurred by the companies.

6. Negative global cues – Market sentiment is negative, with limited good news about the global economy. Weakness in the US stock market, following heightened concerns over consumer spending, has caused Asian and European markets to tumble.

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