Sensex may slip into 'bear' phase as cost of funds rises

Indian equities, which recorded the longest losing streak in nine years, run the risk of slipping into a bear market as investors fret about rising funding costs with policymakers determined to rein in prices sacrificing economic growth.

"There is a possibility of another 10% correction in the Indian market near-term, as the impact of the RBI's rate hike sets in," said Saurabh Mukherjea, Head of Equities, Ambit Capital.

India's Sensex is the worst performer in Asia this year with a 10% loss after returning 17% last year. Investors worry that steep valuations, possible slowdown of the economy, could squeeze corporate earnings . A 20% fall in key indices is broadly accepted as a bear market.

The BSE's 30-share Sensex fell 65.33 or 0.35%, to 18469, extending losses for the eight straight day. The NSE's 50-share Nifty dropped 28.10 points or 0.50%, to 5537.15.

The RBI on Tuesday raised the rates for the ninth time in 13 months to fight inflation that is well above the comfort level. Governor Duvvuri Subbarao said, "Inflation is inimical to sustained growth as it harms investment by creating uncertainty. Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence."

Economic growth forecast for this year is at 8%, down from 8.6% last year. Foreign funds have pulled out close to 2,000 crore in the last few days, including Wednesday's provisional figures.

Analysts are expected to downgrade earnings for companies as they may see slower sales increases and a squeeze in profitability with borrowing, and raw materials eating up cash.

With easy money, the key driver of Indian equities since March 2009, becoming a distant dream even in the West when the US ends the so called QE2 monetary expansion, the pressure on Indian shares could intensify.

"The end of QE2 (quantitative easing2) in June will be closely watched because risk appetite could reduce in an environment of tight liquidity," said Navneet Munot, chief investment officer, SBI Mutual Fund.

But, a sustained economic growth requires some tough measures to cool prices.

"An economic slowdown now is needed to control inflation and investors may need to brace for some pain in the short-term," Anand Shah, chief investment officer, BNP Paribas Mutual Fund.

Source: http://economictimes.indiatimes.com/markets/analysis/sensex-may-slip-into-bear-phase-as-cost-of-funds-rises/articleshow/8163997.cms