Bourses continue to look for direction

By Oommen A. Ninan

MUMBAI, JULY 22. The gloom over the stock markets are continuing with the arrest of top officials of the Unit Trust of India, the largest mutual fund in the country. The `trust' was breached by the top officials who were handling public funds and this hit the confidence of investors in mutual funds.

``Market will continue to look for direction. The saving grace is the positive outlook of foreign institutional investors (FIIs) which continue to pump money into the market,'' said Mr. V. R. Srinivasan, a leading financial analyst.

According to him the next trigger point may come when the Reserve Bank of India softens the interest rate further by allowing the rupee to depreciate. ``Overall nothing much is going to happen in the next few months unless the Government manages to go ahead with the disinvestment programme as originally envisaged,'' he added.

The Bombay Stock Exchange 30-share sensitive index (Sensex) was down by 113.24 points at 3340.75 as compared to 3453.99 in the previous week. On the National Stock Exchange the S&P CNX Nifty was down by 28.05 at 1078.30 points compared to 1106.35 points in the previous Friday.

The visit of the Pakistan President General Pervez Musharraf created a lot of excitement but very little was achieved. However, thankfully both the countries recognised the need to keep the dialogue alive in the hope of solving the core issue of Kashmir which has considerable implications on the economic front of both the countries.

The controversies surrounding the UTI has shaken the confidence of investors further on the capability and transparency of the public sector mutual fund in managing the public money.

Despite early warnings the UTI did not take the initiative to correct the investment pattern under Unit Scheme-64 (US-64) to reflect the basic nature of the scheme. The market is totally confused on the course of action the new team will initiate to reduce the weightage of equity in US-64 scheme. The investors interest as such is lukewarm and any aggressive selling on the part of the UTI will only worsen the situation.

The strike called by the brokers to protest against the rolling settlement is unlikely to change the regulator's mind. Instead of seeking withdrawal of the rolling settlement they should request the Securities and Exchange Board of India (SEBI) and the Government to put in place stock lending as well as funding against shares.

The blame for forcing SEBI to introduce rolling settlement prior to putting in place other facilities associated with that squarely rests with the broking community which resisted the change for a long time. History has shown that investors will adjust to the new initiatives and it is only a question of time before volumes picks up in the market.

While the technical factors are currently unfavourable, the import and export data released by the U.S. is a cause for concern. After almost a decade, the U.S. imports were shrinking though these have not directly affected Indian companies. But if this trend continues for long the U.S. economy may get into a recession having far reaching consequences to the global economy and India in particular.

The only positive impact of the U.S. recession would be lower oil price. The companies in technology, media and telecom (TMT) sector are showing good results despite warnings in the backdrop of a slowdown in the U.S. economy.

There seems to be a shift with more and more businesses getting shifted to the offshore. ``In the years to come it will be interesting to see a negative topline growth but a healthy bottomline in view of the higher component of the offshore businesses,'' said Mr. Srinivasan, adding, ``May be it is time the bigger companies in the TMT sector change their strategy by bringing in more and more offshore business.''

In a recent interview Mr. Marc Faber, the legendary contrarian has said that the global manufacturing will be shifted to China. He has also predicted India will continue its dominance in the software sector. The Government should take the clue from this and shed its obsession with the industry.

It is time the Finance Minister takes a totally new approach towards the economy. It is services and agriculture, that will help India to achieve the economic target and not manufacturing in which India is way behind China.

Even some of the reputed companies are seriously contemplating to shift their base to China which would add to the unemployment woes created by the lack of new projects.

The monsoon session of the Parliament, which begins on July 23, will set the direction for the second half of this financial year. Good monsoons should hopefully revive the demand from the rural sector. Manufacturers of tractors as well as commercial vehicles can heave a sigh of relief. However the task of creating a demand is at the hands of the Government.

Eventhough collections from both direct and indirect taxes are showing a negative trend, the Government should nevertheless proceed with its investments in infrastructure sector which will have its own multiplier effect. On the face of it the next two years may appear challenging but looking from a different angle there is an opportunity to make structural adjustments to the economic components and focus on energy and resources on such sectors where India has a competitive advantage like services and agriculture.

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Section  : Business
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