Indian markets are likely to limp along this week as investors come to terms with the new government's economic agenda, which aims to sustain growth and focus on the farm sector but slow down privatisation.
The United Progressive Alliance, a Congress-led coalition, supported from the outside by Left parties, was inaugurated on Saturday after a shock victory at the hustings 10 days ago, which put markets through a roller-coaster ride last week.
Manmohan Singh, a former finance minister who kicked off India's economic reforms 13 years ago, took the helm as Prime Minister on the weekend with 67 ministers in his central cabinet.
A draft of a 'common minimum programme,' which forms the bedrock of the coalition's economic policy, said the government would aim for seven percent to eight percent annual economic growth, encourage foreign investment, focus on reforms in the farm and rural sector and continue subsidies for the poor.
"In the short-term the market will remain a little jittery until the final contours of the economic policy are made known," said Ved Prakash Chaturvedi, chief executive officer of Tata Asset Management Company.
Fears of a slowdown in economic reforms when Left parties made known their resistance to privatisation triggered a sell-off in the Bombay stock market, causing it to lose as much as 16.6 percent intra-day last Monday.
But news that the man seen as the father of Indian economic reforms would become Prime Minister helped shares recoup much of those losses. By the end of the week, the key Bombay index was down just 2.1 percent. It is still down around 16 percent in the past month.
"The fact that the Prime Minister is an economist is a big relief for the markets," Chaturvedi said.
DIRECTION AWAITED: While the draft economic policy contained no big surprises, analysts still await decisions on a host of issues that will also signal the government's intent.
"There is a strong case for a fuel price hike, given the high global oil prices," said S.P. Prabhu, an analyst at IDBI Capital Market Services Ltd. "Though a hike in petroleum products has an inflationary impact, a quick and firm decision may be welcomed by the markets as showing strong political will."
Asset sales of state firms helped the previous government limit the fiscal deficit to 4.8 percent of gross domestic product, but a slowdown in privatisation, coupled with higher social spending, could lead to higher government borrowing.
The federal government has so far raised 130 billion rupees ($2.9 billion) through borrowing and private placements with the central bank, or 8.6 percent of its budgeted gross borrowing of about 1.5 trillion rupees for the year to March 2005. Analysts expect the new government to review its borrowing programme in the coming weeks but see any major changes being announced only in its annual budget likely in July.
They expect the rupee to tread cautiously this week, with foreign fund interest in local assets and the new government's stance on fuel prices seen acting as indicators.
The rupee, which hit a four-year high against the dollar in April, as foreign capital poured into a clutch of local share issues, has wiped out this year's gains. It hit an eight-month low last Monday on fears that foreign funds would pare positions.
The currency then recovered to make its first weekly gain in six weeks, appreciating 0.7 percent to 45.29/31 per dollar versus the previous Friday close.
Bond yields, which move inversely to prices, are up five basis points in 2004 and are seen range-bound. Yields ended slightly lower last week, helped by the central bank's decision to hold interest rates steady at three-decade lows. The benchmark 10-year bond closed four basis points lower on the week at 5.1730 percent.
FIRMER SENTIMENT: With the government ruling out privatisation of profitable and strategic state-owned firms such as Hindustan Petroleum Corporation, Bharat Petroleum Corporation, Steel Authority of India and Bharat Heavy Electricals, public sector units are likely to be out of favour.
Investors are likely to increase weighting in sectors such as software and pharmaceuticals, which are most likely to be insulated from policy changes, or in consumer goods, automobiles and infrastructure, which will gain from demand and the focus on development.
"Medium-term investors should look at entering the market at this time, because the price-to-earnings ratios are in the modest range of the valuation band," said Chaturvedi of Tata Asset.
The government's emphasis on the farm sector is also going down favourably with the market.
"The major demand will come from rural areas, where the propensity to spend money on things like tractors, trailers, consumer goods can be very high," said Imran Contractor, director of research at Stratcap Securities.
Firmer US and regional indices as global crude oil prices eased off record highs will also boost investor sentiment.
Foreign funds sold a net $720 million of Indian shares over 13 straight sessions to Thursday, well over a sixth of what they had invested this year before political worries set in.
Overseas fund managers remain confident of India's economic prospects in the medium to long term, but some have trimmed their exposure in the short term, fearing the impact of the new policy on labour market reforms and the pace of privatisation.
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