Montage of current Indian Rupee - US Dollar Forex and economic news

The last set of earnings for the year ended March 31 are set to be announced, the derivative contracts for June are due for expiration and another busy season of annual shareholders' meetings is about to get under way this week in India. But amid all the action on the street and between the entries on their appointment diaries, investors will probably be wondering where all the good news has gone.

The interest rate-induced uncertainty has consumers, especially home buyers and car seekers, caught in two minds.

To buy or not to buy now — that has become a big decision to take for many of these consumers at the moment. A fidgety consumer, not knowing which way the interest rate will head in the coming days, has moved into an indecisive mode. That appear s to be hurting the automobile industry, in general, and the passenger car segment, in particular. If the current trend continues, one may well see a real flat growth this year in automobiles.

Demand has begun to soften since the beginning of the current financial year, according to Arvind Mathew, Managing Director of Ford India. The rise in interest rates was gradual during November-March. However, rates had shot up since the new financial year. From 7.5 to 8 per cent, the interest rates on car loans have gone up to around 14.5 per cent now in just about six months. “A car loan at over 14 per cent is too much,” Mr. Mathew said. This had already impacted sales in the current quarter, with passenger car companies reporting flat growth in the first two months. Ford at least tried to get over this interest rate problem. Ford India did offer consumers assistance on the interest rate front. “Instead of giving them accessories free, we offered to give them relief on interest rates,” he said. There were only a few takers for this. “They (consumers) are not willing to trade down,” he said. “Nobody is really certain about the interest rates,” he said. Consequently, people were deferring their buy decisions, he added.

In a discussion at his office in Maraimalainagar near Chennai recently, Mr. Mathew stressed the need to bring the confidence back to consumers. “The Indian economy is growing at a very healthy rate of 9.4 per cent and it is the second fastest growing large economy in the world. With rising disposable incomes and a growing middle class, we are hopeful that this is a temporary blip and will correct itself in due course.” With the inflation rate returning to below five per cent level, he was confident that things would improve in the coming months. Right now, however, commercial vehicle, two-wheeler and housing segments were witnessing a deceleration. “We have to be careful that we don’t kill the economy,” he added. If the rising interest rates were putting the customers off, the chery-picking of loan seekers by banks had not helped the cause of the automobile industry, he said. With funds becoming scarce and costlier, banks were leaving out riskier customers. As a consequence things had become a little bit expensive, he said. The rupee appreciation, happening alongside the rising interest regime, had come as a double whammy for many, he said. All these had resulted in the consumer confidence taking a dip, he said. The Ikon and Fiesta were indigenised to over 80 per cent. In the case of Endeavour, the local content was around 20 per cent, he said. As such, the rupee rise had little impact on Ford. “We also export components,” he said, tongue-in-check.

“Ford continues to be bullish on India. We have just launched the new Endeavour, in the premium SUV segment. We also have plans to launch the Fusion diesel in the next quarter,” Mr. Mathew said. Not just Mr. Mathews. Corporate India is cautiously waiting for things to turn positive in the coming months. At the moment, however, everybody is keeping his/her fingers crossed.

While reporting on the record-setting run on several other Asian bourses last week in my new role as a full-time markets reporter for MarketWatch in Hong Kong, I couldn't help notice the contrast. India's Sensex remained on the side benches, going nowhere, while the other boys on the football field were romping the ball home.

But take a closer look, and the handicap is quite evident. Among the Sensex's 30 constituents, the four technology counters - Infosys Technologies Ltd. (INFY) , Tata Consultancy Services, Wipro Ltd. (WIT) and Satyam Computer Services Ltd,. which together command about a 25% weighting on the Sensex and have led its charge on several occasions in the past, are often found napping these days.

Between April 13, when Infosys announced its guidance, and Friday, their shares have remained uncharacteristically silent, trading within a narrow band. During the same period, the Sensex added more than 1,200 points on continued foreign fund inflows into India and the mettle of a few of its other heavyweights, but now seems worn out at its closing level of 14,467 on Friday.

You can blame this on the Indian rupee's sprint against the dollar. Infosys's April 13 guidance had factored in the dollar's exchange rate at 43.10 rupees. The dollar is today worth just around 40.50 rupees, and would probably have slipped further, but for some central bank intervention.

As July draws closer and Infosys' April-June period earnings date approaches, the air is no longer filled with feverish anticipation, nor is there an expectation of a pre-earnings rally. Instead, there are fears that disappointment may be in store on Infosys' guidance front.

As I've mentioned previously, Infosys is known to be conservative with its guidance and may well have provided itself a buffer to the forecast of a 24.2% year-on-year growth in earnings for the first quarter and 20%-22% growth in earnings for the full year. Infosys and its peers, unlike other exporters from India's manufacturing sector, also enjoy a competitive advantage due to the vast talent pool of software engineers available and strong order flows from clients in the West.

The decades-long Russia-India defense relationship is being strained by Moscow’s recent demands to renegotiate pending and even completed arms sales to India.

The new terms could delay the delivery of key weapons and gear and add more than 10 percent, or about $2 billion, to the cost of deals signed in the past three years, a senior Indian Defence Ministry official said.

The tough talk is also forcing India to reconsider Russia as a reliable arms supplier, and may signal the decline of the Indo-Russian defense relationship, the official said.

Much of India’s arsenal is of Soviet or Russian design and supply. Current Indian orders of Russian arms total some $10 billion, and include 350 T-90 tanks, 40 Su-30 combat aircraft, 80 Mi-17 medium-lift helicopters, technology for the RD-33 engine that powers MiG-29 aircraft, Smerch multibarrel rocket launchers and three stealth frigates.

The Indian official said Moscow was demanding the extra money because Russian defense firms are struggling and subcontractors in former Soviet republics have raised prices as the U.S. dollar has fallen against the Indian rupee. Foreign investment is pouring into the booming Indian economy, strengthening the local currency.

A Russian diplomat at the Embassy here said Moscow wants to get a fair economic price for its weapons and gear. He declined to elaborate.

But local observers wonder whether the Russian moves are purely economic.

“Indo-Russian relations have endured many years and there is unlikely to be a sudden shift overnight. And both countries are aware of the dividends of a continued relationship,” said Gurpreet Khurana, senior fellow at the Institute for Defence Studies and Analysis think tank here.

But upcoming moves will shed light on Moscow’s motives.

“For example, how do the Russians deal with the Chinese on arms sales?” Khurana said.

Another local analyst said the shift reflects Russia’s recent global assertiveness.

“Russia’s newfound economic strength based on energy supplies is the foundation of greater confidence in international relations, which is being exploited by the brinkmanship model of diplomacy followed by [Russian President Vladimir] Putin,” said Rahul Bhonsle, a retired Indian Army brigadier general. “Strengthening of the ruble and corresponding weakness of the dollar is another important factor.”

But others say Russia, for three decades India’s chief arms supplier, will not abandon a market with an estimated value of $70 billion over the next seven years — especially as India attempts to import technology from the United States and other Western sources.

“Both sides need to be pragmatic,” said Gurmeet Kanwal, a defense analyst with the Centre for Air Power Studies here. “Dozens of weapons and equipment factories in Russia depend on Indian orders, [without]which these would have to close down.”

And Russia depends on Indian sales to lower the cost of buying arms for its own military, Kanwal said. India’s buyers’ clout also can ensure that high-tech designs are not transferred to countries inimical to India, he said, but “to expect Russia to not sell aero engines to China would be unrealistic.”

Khurana cited Indo-Russian efforts such as the BrahMos supersonic cruise missile, jointly developed by both countries, and the Su-30MKI fighter jet, which is being built under license by Hindustan Aeronautices in Bangalore with many Indian systems.

“I do not think that Indians will cease doing business with the Russians,” he said. “The collaboration on a fifth-generation [fighter] aircraft is also likely to go ahead.”

But the BrahMos missile program has also caused friction. Last year, Russian officials accused BrahMos Aerospace of selling the missile to Indonesia and other countries, undercutting Russian sales efforts

Even so, the sharp rise in the rupee poses a real danger to its forecast and the street could be expected to wait in nervous anticipation for its first quarter results over the next few days.