The double-digit inflation figures released on Friday shook investors and broking houses alike. While the market mood is uncertain, major brokerage houses said they expect the higher-than-expected inflation figures to impact bottomlines.
On Friday, the wholesale price index shot up to a 13-year high of 11.05 per cent year-on-year (YoY) in the week ended June 7 from 8.75 per cent the previous week. It was well above the consensus estimate of 9.8 per cent YoY.
HDFC Securities, in a note to clients, said, "Rising inflation could bring pressure on the rupee, especially if the foreign institutional investors start withdrawing in a big way. This could create a cycle of lower rupee and stock prices. It could also lead to a downgrade in earnings in most industries."
A broker pointed out, "Tightening measures by the Reserve Bank of India on the back of high inflation would impact the investment and consumption climate in the country. This would put pressure on the profits and profitability of companies."
FIIs have been net sellers in the market this year, selling as much as Rs 22,847 crore (Rs 228.47 billion) worth of equities so far this year, according to data from Securities and Exchange Board of India.
Market participants see no let-up here. However, they feel that inflation is a problem with most Asian countries today. India joined a growing number of Asian countries that are no longer able to afford big subsidies in the wake of rising prices.
Earlier, China registered high inflation after it increased petrol and diesel prices by 18 per cent.
Consequently, FIIs are pulling out of most emerging economies barring energy-surplus countries such as Russia and Brazil.
"The markets are going to be like this because the general feeling among FIIs is that on a relative basis, India still looks expensive. Russia and Brazil look cheaper than India at this point in time and it is no surprise that we are not seeing any money from FIIs. Whatever little is coming is from the domestic players," S V Prasad of Schroders PLC told a TV channel.
In terms of policy measures, market participants feel that a hike in cash reserve ratio (CRR) and repo are in the offing.
"The market has partly factored in a hike," said Deven Choksey, managing director of KR Choksey Securities. If interest rates harden, it would affect the capital expenditure plans of many companies. Any kind of sectoral impact will not be felt immediately. However, if interest rates do not come down, there will be some impact, he added.
Some brokers, however, point out that the current situation is transitory in nature and investors should take advantage of the opportunities to build a long-term portfolio.
"Given the changing economic environment, we do see a significant divergence in performance of individual companies, and from a risk-adjusted perspective, investors who buy into good quality names will do well over a 1-2 year perspective," said India Infoline Chairman Nirmal Jain.
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