Inflation, current acc deficit to hit D-Street this yr: report

Wiping out hopes that the stock markets will scale new highs in 2011, a report said that the year will rather bring negative returns for the Indian equities, with a string of disappointing cues from the domestic arena.

"In all likelihood, 2011 will be a year of negative returns for the Indian equities. Growth in capital formation is faltering, current account deficit is widening due to rising energy import dependence, inflationary pressures are building up and policy rates are set to further harden," a report by brokerage house IIFL said.

In the year gone by, the stock markets benchmark Sensex gave a modest return of over 17 per cent and witnessed an all-time high closing on Diwali day.

However, in the current year, the equity markets will have to struggle with the current account deficit, which is running over three per cent of the GDP. The widening current account deficit will slowdown the foreign capital flows which in-turn will upset several macro-economic variables, it said.

Besides, rising energy import dependence, coupled with the recent spike in energy prices, is also a concern for the domestic stock markets.

Also, the inflationary pressures are likely to dictate RBI's monetary policy outlook in the first half (H1) of 2011.

"While headline WPI will decelerate YoY till January this year due to the higher base, the medium-term outlook for inflation is already changing for the worse and this will dictate RBI's monetary policy outlook," it said.

If the rupee comes under pressure owing to a slowdown in capital flows, it can potentially aggravate the inflationary outlook. It is now widely expected that policy rates will rise by 50 bps in the monetary policy review this month, the report noted.

It also feared that consensus growth estimates will see downgrades, and deterioration in the earnings mix will weigh down market valuations.

Meanwhile, on a brighter side the report showed optimism that software and pharma sectors remain strong and the growth environment is very favourable for them in this year.

Besides, the country's FY11 fiscal deficit will be at 5.1 per cent of GDP, much lower than the budgeted 5.5 per cent, it said. The bonanza from 3G auctions, higher than budgeted tax collections will help more than offset higher government expenditure and higher oil subsidies this year.