By Ruma Dubey

Undoubtedly, there is a turnaround in sentiments. From being morose and pessimistic, there is a perceptible shift to hopeful and optimistic. Downgrades and current account be damned; those are thorns which the markets have decided will take once the economy is kick started by the new FM, Dr.Manmohan Singh. There is a sense of palpable expectation and there are now reports of Indian looking as a bright destination for stocks. The rise in June PMI and last week, Coca Cola announcing rise in India capex and GM announcing plans to set up factories here has buoyed the spirits.  This, by most is being looked upon as an indicator that India is indeed getting back into the groove.

Economic analysts say that there is more good news round the corner. India’s balance of payments (BoP) remains precarious; at least that is what one could gather from the data put out on Friday. India’s current-account deficit rose to 4.2% of GDP for FY12 v/s 2.7% of FY11, after staying below 3% since 1991. But given the 20% depreciation of the rupee vis-à-vis the US dollar over the past 12 months, many feel that this has curbed imports and exports, as such, due to the falling rupee would look good and this is expected to soon start showing in the numbers. A report has been put out by Goldman Sachs which stated that for every 1% fall in the value of the rupee, adjusted for inflation, will lead to a 1.1% increase in exports with a lag of two months and a similar fall in imports after four months. So the next few months should start giving us a better picture.

The moods are so optimistic that the markets today ignored the downgrade by Macquarie Equities Research of the Indian IT sector. It downgraded the IT services sector to "underweight" from "overweight" and cut ratings of TCS, Wipro and Infosys to "underperform". It removed TCS from its top-10 list, replacing it with ICICI Bank. For Infosys too it has citied worries given the fact that 30% of its staff is on the bench and has delayed joining dates for new hires due to slowdown.

But then the question which comes to mind is – won’t the falling rupee boost the earnings of these IT companies where over 60% of the business comes from USA? Not much as there us a fall in demand, which could be covered up by the falling rupee. But for the falling rupee, the earnings could actually come off even more. We could see higher margins but a dip in volumes. Moreover, most of these front runners have given a muted estimate for the coming quarter and brokerage houses too have put out reports which advice caution. Thus for IT companies, despite the rupee depreciating, the global weakness keeps the outlook pretty dim.

On the other hand, Macquarie has gone "overweight" on industrials from "neutral". And this change is based on growing optimism about spending in the infra sector and oncoming reversal in the interest rate cycle. Adding proper brick and mortar companies like BHEL, HPCL, Asian Paints and Wockhardt while removing ‘service’ oriented stocks like HDFC and Mindtree, the research sends out the message loud and clear – it is time to stock up on these old fashioned ‘industrial’ stocks. That, looking ahead, seems to be the flavor of the oncoming season.

The big worry right now is the monsoon. It seems to be playing truant and unless it starts pouring soon, our macro worries will get larger and this small sense of optimism could get scorched in the parched lands. It is not yet time to press the panic button but surely, the button is being eyed. If rainfall continues to misbehave over the next 10 days, we are in for a very very tough year. 

The Q1FY13 earnings season will start next week, with TTK Prestige scheduled for 8th July, IndusInd Bank on 10th July, HDFC on 11th July, Infosys on 12th July along with May IIP data. Though not yet offically announcd, news is that TCS is also to announce Q1 numbers on the same day as Infosys, 12th July.

Those will largely remain the cues for the coming days.  Moods remain optimistic now but going ahead, global factors and economic policy announcements will dictate sentiments.