Indian stocks have slid by around 10% from their record peak late last year. Last week they concluded a nine-day losing streak, their worst run in ten years. The problem? Stubborn inflation.
The Reserve Bank of India has been “the most aggressive” in Asia, says Deepak Lalwani of the India Report. It has now hiked interest rates nine times since March last year. The latest increase of 0.5% last week took markets by surprise; only a quarter-point hike had been pencilled in. But the bank hasn’t made much progress. The bank’s governor, Devvuri Subbarao, says that price rises “have significantly overshot even the most pessimistic predictions over the past few months”. Inflation hit almost 9% in March, compared to the bank’s estimate of 8%.
Inflation has partly been a commodities story. India imports around 75% of its annual energy needs and the jump in food prices has hurt – 40% of people survive on less than $2 a day. But strong growth of more than 8% has also fuelled domestic price pressures. Bloomberg.com notes that a survey tracking growth in the services sector accelerated in March, and commercial loans were 22% up year-on-year. Core inflation is at almost 8%.
“Elevated levels of inflation mean the rate-hike cycle will be prolonged further,” says Sonal Varma of Nomura Holdings. This implies a slowdown in short-term growth. Wage pressures and increased raw materials costs are also a headache for companies. These are already denting earnings and worrying foreign investors, who were net sellers in the first week of May.
The clampdown on inflation, its impact on growth and the uncertainty over when it will end, are not the only problems. Another is that Indian stocks, typically among the more expensive in the region, still aren’t deemed cheap enough to be enticing, reckons Saurabh Mukherjea of Ambit Capital. He sees the Sensex, now at around 18,500, sliding towards 16,000 by June.
Given India’s encouraging long-term potential, however, any further weakness would be a buying opportunity. It boasts excellent demographics and is expected to become the fastest-growing economy in the world by 2020. Its economy is driven by domestic demand, while China’s is dependent on foreign buyers. One way in is with Aberdeen’s New India Investment Trust (LSE: NII).