Middle-East Tremors Felt in India, Sensex Sinks 546 Pts

Investors fear boiling crude will hit economic growth & corporate earnings

Indian shares fell the most in 15 months, making them the worst performers in Asia, as the Middle-East civil strife-fuelled rally in crude oil prices can tear up
the nation's economic fabric.
Surging oil prices will amplify inflation and interest rates that are dominating the minds of everyone, from Prime Minister Manmohan Singh to thousands of common men, who are publicly protesting months of stubbornly high prices.
"The jump in crude oil prices is the biggest concern for investors for now, because this could lead to contraction in economic growth and corporate earnings growth," said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance. "If political unrest in Libya spreads to other oil producers, the global economic recovery would be at a bigger risk."
Benchmark Sensex tumbled 3%, or 546 points, to 17,632 led by ICICI Bank and Tata Motors. Twenty-eight constituents fell barring Hero Honda and Hindustan Unilever. NSE's 50-share Nifty slid 175 points, or 3.2%, to 5,263. More than three shares lost, for every gaining share. The MSCI Asia Pacific Index fell 0.9%.
Foreign funds sold shares worth 2,702 crore on Thursday, provisional data from BSE show. After investing $29 billion in 2010, they have pulled out 7,300 crore in less than two months, dragging the Sensex down 14% this year, with Reliance Communications topping the list with a 36% slump.
Trickling in forecast of crude oil at $200 due to potential supply shocks, though maybe far fetched at this point, are worrying investors who are just recovering from the worst recession since Great Depression. India, which imports more than two-thirds of its needs, will be worst hit given its already high current account deficit—the excess of imports of goods and services over exports.
Street slumps to 15-month low Foreign funds sold shares worth 2,702 cr
Why did stocks tumble
Rising crude oil prices due to unrest in Arab countries will further push up inflation. Oilcos may pass on part of the rise. Since transportation costs will rise, manufacturers will pass on the hike, which will slow demand and corporate earnings growth. Market has also been uneasy about the state of the fisc and fears of further rate hikes
What could be next in store
Downtrend may continue if the finance minister does not impress investors with reform measures in the budget. Investors expect a cut in subsidies, reduction in fiscal deficit and measures to limit current account deficit. If FM delivers on some of these, there could be a short rally. If geopolitical risks intensify in Middle-East and oil spirals to $200, slide could continue Fuel Subsidy to Push up Fiscal Deficit
    The government may subsidise fuel, but it would show up on fiscal deficit which will crowd out private investment.
Crude oil futures flirted with $120 a barrel after protests in Libya to overthrow dictator Muammar Gaddafi raised oil supply worries. This revived concerns that the government may reveal a higher borrowing target for 2011-12 in the Union Budget on Monday to subsidise fuel prices, throwing to winds of expectations that subsidies may be cut. Brent crude, a benchmark for Indian purchases, is up 20% in a month. The government estimates total loss to state-owned oil marketing companies could be Rs1 lakh crore this fiscal on selling diesel, domestic cooking gas and kerosene below cost, which is at least one-third more than initial estimates. Analysts believe it could go over Rs 1.3 lakh crore. Investors are worried the revolt in Libya, which contributes 2% to the global daily oil output, could spread to other suppliers in the region. Nomura International in a report forecast oil prices could climb to $220 a barrel, if Libya and Algeria were to halt oil production together. Worries about oil joins the raging food inflation , which rose an annual 11.49% in the week ended February 12 from 11.05% a week earlier. RBI governor D Subbarao has reportedly said the central bank can act at any time to deal with the evolving macroeconomic situation. It has raised the inflation target for the year to 7% from 5.5%, and has raised policy rates seven times in 12 months. Policy actions have led to borrowers paying high rates for funds, and depositors are being lured with interest rates as high as 10.5% a year from just 6% about 15 months ago for oneyear deposits. RBI reviews monetary policy on March 17.
This could strain government finances, which got a boost from a one-time income of more than Rs1 lakh crore from sale of spectrum to telecom companies. Gross fiscal deficit is estimated at 5.3% of GDP in 2011-12 and the government's net market borrowing is expected at 4.2 lakh crore, which takes the gross borrowing requirement close to 5 lakh crore, according to Barclays Capital. "The government's budget projections can be based on more optimistic assumptions, and show a fiscal deficit target of 4.8-5% of GDP and net borrowing of 3.8-4 lakh crore in FY 11-12," the investment bank said.