On 5th November 2010, whole India was gung-ho on India growth story which saw the benchmark index close at a high of 21005-points on the BSE Sensex.
The surge in optimism, then, was supported by a record FII inflow of $6.4 billion in the preceding month of October, which accounted for nearly 1/4th of the total equity inflows during the year, at that time.
However, that’s a past now – during the ensuing 2 months, markets have witnessed a sharp crack from its highs on the back of concerns emanating from a combination of issues such as bank loans bribery scam, soaring inflation led by spiraling food prices, weak industrial output data and impending rate hike from the Reserve Bank of India.
The 2145-point cut, which has seen Sensex dip below 19000-mark, was on the back of rigorous selling by investors which led index to tumble to a four-month closing low. Moreover, markets have posted its worst weekly loss in eight months led by a slump in interest rate sensitive sectors such as real-estate and banking.
Top Reasons for Stock Market Fall
1) Bribe-for-Loans Scandal – We don’t want it any more!
Scams, depending upon their size and nature, can have immense sentimental impact on the investors and capital markets; especially so if it has links from the corporate world.
The infamous cross-country housing loan scam has exposed the weaknesses in lending practices despite RBI boasting of prudential lending norms being followed by Indian banking fraternity. The bribe-for-loans scandal relates to a loan syndicator bribing lenders from various state-owned banks and LIC Housing Finance to get big-ticket loans sanctioned.
This act of bribery case, which unearthed nexus between the realty developers and senior management of banks through loan syndicates, sent markets into tizzy in late November as number of banking, realty and construction shares slumped by 15-20% within a matter of few days.
2) Weak Industrial Growth – Providing a reality check!
As if there was no dearth of negative news flow, the industrial output data for the month of November plunged to an 18-month low of 2.7% – compared with 11.3% for the same month of last year – on the back of unseasonal rains and working day loss during couple of months before the year end.
Industry analysts are attributing this softness in industrial numbers to moderation of demand and sluggishness in certain sectors like wood products, mining and electricity and manufacturing sector which logged in a growth of just 2.3%, as against 12.3% in Nov’09.
3) Spiraling Inflationary Pressures – Government already given up!
The UPA government has almost given-up in terms of its ability to tame accelerating food inflation at a time when highly seasonable green-pees are sold at Rs.25 per kg as against onion prices of over Rs.45 per kilogram.
No, I am not going to further propagate the highly-publicized onion prices in this article. We’ve had enough of rumblings surrounding the onions prices, by now. Let me get back to the core inflation. India’s annual rate of inflation based on WPI rose to 8.43% in December, as against 7.48% in the previous month.
The index for fuel and manufactured products rose by 1% and 0.4% respectively. Well, even if I don’t wish to touch the sensitive issue on food inflation, just see this how I am being dragged to cover this very same topic again – the index of primary articles surged by 3.5% in December and that for food products rose the fastest at 3.7% during the month.
4) Rate Hike Fears – Your EMIs could Rise further!
Oh! Yes… you might still gain if you’ve excess cash-on-hand which may fetch you extra interest on your fixed deposit investments. But, it could be a nightmare for you, if you’re one of those home loan borrowers – as RBI is likely to hike key interest rates in its policy review on January 25.
However, market pundits are divided on whether the hike to be announced by the RBI would be 25 bps or 50 bps. After the recent weak IIP data, analysts are betting on a more subdued hike of 25 bps aimed at balancing growth expectations and tackle severe price pressures. By now, stock markets have already discounted a 25 bps hike.
5) Corporate Earnings – To be hit by surging Input prices!
The earnings season has already commenced with below expectation results from Infosys Technologies. Further, with interest rates on an upward curve, a number of Indian companies that have leveraged their businesses are likely to see an up-tick in their debt servicing costs and impact on earnings to that extent.
A surge in global commodity prices is also likely to keep a check on operating profits of the India Inc. Rising input costs may put pressure on the companies to pass on the hike to the consumers, ultimately leading to tepid demand and lower off-take of consumption.
So, are you counting on this market correction as a buying opportunity?