Mumbai, 1 August
Investment banker Goldman Sachs today further roiled the market sentiment by downgrading Indian equities to “underweight” citing delayed growth recovery coupled with rising vulnerability of the economy on account of potentially ineffective measures.
As it lowered its 12-month CNX Nifty target to 6,200, shares started crumbling under sell-off reversing early Thursday morning’s confident start on Dalal Street.
The “underweight” rating may stick longer as Goldman Sachs says: “We see limited room for re-rating unless macroeconomic conditions turn favourable.”
The global investment bank has favoured export facing sectors which may benefit from better external sector growth and weaker currency as it advises investors to avoid rate-sensitive and industrial sectors given the cyclical pressure from rising rates and slower growth.
The partially convertible rupee also weakened further forcing the Reserve Bank of India to come to the rescue with an unspecified amount of dollar sale. The currency opened at 60.78 per American dollar against 60.40 on Wednesday. It sank to an intra-day low of 60.83 per dollar. The RBI intervention directly or through state run banks helped the domestic unit to shore up and the rupee ended the day at 60.43 a dollar.
Goldman Sachs analysts have asked investors to be wary of the market and preferably reduce their stock portfolios. In its opinion, the Reserve Bank of India’s efforts to support the partially convertible rupee could worsen the country’s economic slump.
To back up this contention, Goldman Sachs points out foreigners had sold $2 billion debt in July taking the tally for June and July to $5.4 billion. Two months’ outflows from stocks also reached $2.8 billion which is the highest since the global financial crisis of November 2008.
The global investor in its report says the rupee will stay under pressure and the RBI may keep liquidity tighter for the next 3-6 months.
The currency has been under pressure on account of current account deficit as well as fiscal deficit since the CAD for the financial year 2012-13 as on 31 March had been 4.8 per cent.
Goldman Sachs says the improvement in CAD could be gradual to 4.2 per cent for the financial year 2013-14 and 3.4 per cent for 2014-15. The pressure on the Indian rupee will continue if the US rates move higher and capital flows dry-up or even potentially reverse. This would add pressure on CAD.
The forecast for rupee/dollar movement for the rest of the year is 60 per dollar. But it expects weakness to persist with the rupee slipping to 65 per dollar by 2016.
The utterly gloomy picture of domestic stock markets instantly pulled down the benchmark indices. The S&P Bombay Stock Exchange Sensitive Index resumed the day on a confident note with an increase of 223.50 points at 19,569.20. It fell sharply after Goldman Sachs declared the equities “underweight.”
The fall was sharp taking the 30-stock Sensitive Index down 175.24 points to 19,170.46. The intra-day fluctuation because of volatility was 398.74 points. The markets managed to withstand the mid-noon hammering and recovered gradually to trade with modest gains.
However, as the markets appeared to have stabilised, the indices again came under selling pressure. The Sensex ended 28.51points or 0.15 per cent down at 19,317.19. The 50-stock CNX Nifty of the National Stock Exchange also turned volatile and moved between a low and high of 5,676.85 and 5,808.56. It closed 0.25 per cent or 14.15 points down at 5,727.85 points.
The top losers in the Sensex group included BHEL at Rs 150.85 (-4.80 per cent), ONGC Rs 280.30 (-3.64 per cent) and RIL Rs 850.30 (-2.44 per cent). The top gainer was HDFC Bank at Rs 632.10, up 3.67 per cent.