Is Indian equity market poised to enter into bull phase?

Is Indian equity market poised to enter into bull phase? The question appears every time we see a brief rally.  However, I think in most optimistic scenario this is too early to expect a bull rally from here. Even though I believe that certain names has the potential to see a rally.

Industrial growth remains weak--- and growth expectation revised downward

The seasonally adjusted purchasing managers' index (PMI) for the manufacturing sector dropped to 52.9 in July from 55 in June. New orders grew at the weakest pace since November 2011, with new export orders falling for the first time since October 2011 hurt by the lingering global economic slowdown. Same report indicated that orders decelerated faster than inventory accumulation, suggesting that the slowness in output expansion will continue in the months ahead. In another sign of cooling economy, India's merchandise exports fell 5.45% to $25.07 billion in June from a year earlier, while imports slid 13.46% to $35.37 billion, according to provisional data issued by the Ministry of Commerce. Now the short term potential growth target for Indian economy is 5.5% to 6%.

Inflation remains an issue specially after below normal monsoon

June inflation, at 7.3%, was below market consensus (7.6%). Primary articles inflation continues to be high at 10.5%, but there is little RBI can really do about it. The case for a RBI rate cut has surely strengthened with core inflation persisting at 5.0%.  However, Poor rains can push inflation to 10%. A study by Bank of America shows a 5% swing in agflation impacts inflation by 175bp. This will likely push up inflation to around 10% levels. Even though RBI can not combat a weather shock, poor rains may increase call of the RBI holding rate still in 2H12 to ward off any criticism about being 'soft' if poor rains fan inflation to 10%, especially if diesel prices are hiked as well. It is for this reason I expect that the window for the RBI to support growth will narrow in coming months.

Rates high; relief only by 3^rd Qtr

RBI raised its official policy rate by 375 basis points between March 2010 and October 2011 in order to restrain inflation, cut the rate by half a percentage point in April, to 8%. However, Inflation remains uncomfortably high, which will limit the scope for further reductions.

High lending rates are hurting loan demands, as per RBI report Indian banks' non-food credit growth slowed to 16.5 percent in May, compared with 21.9 percent in the year ago period. The deceleration in non-food credit was led by commercial real estate, where growth was only 2.8 percent, sharply down from 19.9 percent in the year ago. 

The growth in credit to industry, services, non-banking financial institutions, as well as personal loans, also declined in May. The sharp decline in loan growth is accompanied by the fastest rise in bad loans of Indian banks and incremental growth in their restructured loans, at least in the past four years.

The only sector that showed an increase was agriculture, where credit growth was 14.6 percent, compared with 12.8 percent a year ago, the data showed.  “The demand for credit has slowed down in line with the slowing economy, the demand for credit will revive only when the investment environment turns conducive,” Which I am expecting only 4^th qtr (January –March) onward, limiting the equity market rally.

In my opinion the below normal monsoon in India is the biggest challenge, as this not only restrain the monetary response but also increase the chances of social upheaval. When I say social upheaval it does not mean a coup but political response under which no party gets a mandate which can bring the structural change and policy measure necessary for growth.

“Them belly full but we hungry ...

… A hungry man is a angry man ...

… A hungry mob is a angry mob.”

—Bob Marley,