Sensex poised for volatile trading

Rising anxiety about the health of the global economy will cast a long shadow on Indian shares this week, while falling oil prices are unlikely to provide much comfort to nervous investors who have been grappling with volatile markets.

Although inflation has eased for two weeks in a row, it remains near 16-year highs and the new Reserve Bank of India governor, D. Subbarao, who took over on Friday has said his priority was calming price pressures.

"There are too many dark clouds hanging over the market," said stocks trader Rasesh Shah. "It will be tough going with the headwinds picking up."

Worsening prospects for the US and European economies, combined with a slowdown in China, India and Brazil, are expected to lead to a global contraction and put immense pressure on corporate earnings across the board, he said.


Information technology companies like Tata Consultancy, Infosys, Wipro and Satyam which rely on the US for most of their business could be hurt if the world's largest economy slips into a full blown recession.

Shah said the gloomy business outlook had pushed the stocks of these companies sharply lower last week, even though a weakening rupee was a big positive for the export-dependent companies.

Commodity firms will also face the heat as shrinking growth in China douse demand and pile downward pressure on prices.

Goldman Sachs last week downgraded US steel stocks to 'neutral' from 'attractive' and lowered its price forecast for the metal in the next 16 months because of slowing economic growth in China and a strengthening dollar.

Steel prices are likely to average $923 a tonne this year and $951 next year, Goldman said, 3.2 per cent and 6.1 per cent less than it previously forecast.

This will have an impact on Tata Steel, the world's sixth-largest steel producer, which now gets the bulk of its earnings from its Corus unit in Europe. Its domestic operation along with rivals Steel Authority of India and JSW Steel have been facing pressure from a government-engineered price freeze since May.

The benchmark Sensex index, which slipped 0.6 per cent last week to 14,483.83 last week, could see a slide in the near term as investors turn risk averse.

Grim forecast

Lehman Brothers said in a report released on Friday the Sensex could drop 10-15 per cent in the short term to 12,500-13,000 and forecast borrowing costs to remain high in the next three to six months.

However, the US research house said the fall should be used as an opportunity in the coming year to accumulate shares. Corporate earnings have been affected by higher interest rates, rising raw material costs and high yields, but margins are likely to stabilise in coming quarters in a deflationary commodity environment, it said.

Investor should consider buying shares in banks and in auto, media, consumer, telecom, real estate and pharma companies, but avoid capital goods, non-ferrous metals and cement companies, Lehman said.

Equity strategist V. Venugopal said it was too early to suggest inflation had lost momentum and the Reserve Bank of India (RBI) was more likely to raise interest rates again in October, when the central bank is scheduled to review policy.


Annual inflation in the week ended August 23 was at 12.34 per cent, edging down from 12.63 per cent two weeks earlier, but well above the RBI's target of seven per cent.

Venugopal said a sliding rupee and an Organisation of Petroleum Exporting Countries (Opec) meeting this week would be closely watched.

The rupee, which has tumbled nearly 12 per cent this year to a 21-month-low of 44.7 per dollar, could weaken beyond 45 this week, he said, as refiners step up dollar purchases to buy oil.

The currency has been under pressure after India's trade deficit jumped to a monthly record of $10.8 billion in July, with oil imports soaring 69.3 per cent to $9.48 billion. The gap stood at $41.23 billion in April-July, sharply up from $27.35 billion in the year-earlier period.

The Opec meeting in Vienna this week could announce a cut in crude output to halt tumbling prices of oil - down eight per cent last week to below $107 a barrel from a recover over $147 in mid-July.