Shubha Ganesh by jennyyingdi

VIEWS: 4 PAGES: 3

									                 GDP slowsdown but inflation is stubbornly high


26.6.11

Stock markets do indicate the collective opinion of the people and it is now indicating
their nervousness. Markets are showing investor’s nervousness about India’s growth
story and nervousness about the inability of the authorities to control the
macroeconomic environment. The markets are ringing the alarm bells that inflation
continues to be higher than expected despite a hefty cumulative increase of 325 bps in
policy rates since early 2010 and increasing indications about moderation in growth.

Slowdown in GDP growth
RBI embarked on rate hike program to control inflation and maintain growth. Interest
rates systematically went up throughout 2010 and 2011 but inflation too continued to
rise unabatedly. The rates have been hiked to such an extent that now interest rates are
brining to hurt growth and inflation is showing no signs of slowdown. This is a
double whammy for the stock markets are the basic fabric of Indian growth story is
being threatened due lopsided policies of the government. On the one hand RBI is
increasing rates but this is not supported by fiscal measures. The Government
thorough its various guarantee schemes is indirectly introducing stimulus to the
economy which is supporting demand for goods and services. This indicates that
inflation cannot be brought down by increasing rates which suppresses demand but by
increasing supply of goods and services making inflation a supply side issue.

Second half of the year too could be challenging
Analysts expected that the monetary policies would take care of inflation and that in
second half of CY-2011 the stock markets will resume their upward journey. But as
things stand today the markets will probably face the challenges of global economy
and India’s monetary concerns in the second half too. Analysts anticipate that the
market will be able to digest only one more rate hike by the central bank and anything
beyond that will trigger deep negativity in the markets.

Dipping corporate confidence
Concern over growth momentum has lead to the decline in corporate confidence.
Corporates are shifting gears from growth mode to defensive mode in an attempt to
protect their companies from hostile environment of rising interest rates and declining
demand and profitability. This could delay in investment cycle and impact GDP
growth. The impact of these actions could suppress the GDP growth for a few years.

Policy action needed
As mentioned the stock markets are just indicating how things will be if no corrective
action is taken. The message from the markets is that rates hikes have to slowed and
government needs to put reforms on fast track to iron out the structural issues of the
economy to bring about an investment led growth rather than a consumerism led
growth. With monsoon session of the parliament about to begin analysts are pinning
hopes on some policy action to avert growth slowdown in the economy.


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Investment Strategy

The sharp fall in the markets has lead to a steep decline in the market value of stock
portfolio for many investors. Technical indicators are indicating more downside for
the markets. But investors should not panic and exit stocks in a hurry. At this juncture
good stocks are available at very attractive valuations and bad stocks have probably
fallen more. Instead of jettisoning the whole portfolio of stocks in anticipation of
more down side investors should spend time to check which stocks in their portfolio is
good for the long term and which is not. They should retain the good ones and replace
the bad stocks with new quality stocks that are available at mouth watering valuations.
This switch will enhance their portfolio value once the market recovers. There is no
doubt about market recovery as the issue under debate is whether the recovery will
occur now or in six months or take a bit longer.




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