More Agonies And No Ecstasies

The reality continues to be grim for the market and for the economy. The flow of unfavorable news kept the BSE sensitive index volatile through the week.

As soon as the market discounts one bad news and makes a recovery, there comes another one almost wiping off the little gain that the market managed to achieve. This has made investors lose confidence in the market and their desperate search for market stability just continues. While everyone thought that the frequent shocks from the US market were almost over and hoped for a market recovery, the news from the domestic front about higher rate of inflation dampened the mood on the street once again. In fact, inflation paused some threat to the market but it became all the more dangerous when the annual rate of inflation was higher than what was expected.

The annual rate of inflation, stood at 6.68 per cent for the week ended March 15, 2008 as compared to 5.92 per cent for the previous week ended March 8, 2008. The rate of inflation was expected to be on the higher side but according to a survey there was a consensus among analysts that it would be at 5.95 per cent.

As soon the figures were released, up went the alarm bells and the government at the centre swung to action to curb the rate of inflation.

The government has to make sure that the prices of essential commodities are maintained at an acceptable level otherwise it could become political and the opposition could make it an election issue especially when the general election is imminent. However, it becomes difficult for the government to finely balance the growth rate and keep inflation under control.

As a quick-fix measure to control the rate of inflation the government banned exports of many food items and even reduced the excise duty on some products. The government has also asked steel manufacturers to cut down the price by 15-20 per cent or face resentment. Steel companies are already under pressure on account of higher raw material prices and therefore any reduction in price will directly impact their bottom-line. The measures adopted by the government are all short-term in nature and will hardly show any result in the long-term. The problems are on the supply side and they are to be addressed and something needs to be done on the supply side.

What will be the impact of high rate of inflation? Primarily the rate of interest has remained high and it has not shown any indication of cooling off. As a result it has impacted the overall credit-off take.

The RBI is meeting on April 29 to decide on the interest rate issue, but there is a strong feel that the RBI will not attempt to lower interest rates but will take steps to tighten liquidity. If there is no tightening, it is seen as a sign that the RBI is putting growth before inflation, but we see it as a remote possibility as RBI Governor Y V Reddy has recently stated: "Inflation is unacceptably high and the Reserve Bank of India is ready to take steps to contain it".

With higher rate of interest even growth is expected to slow down. This is a view even the finance minister P Chidambaram holds. A recent report by Asian Development Bank also suggests a slowdown in the Indian economy. Asian Development Outlook 2008 (ADO), forecasts that following a slowdown in 2007, the economic growth will moderate to eight per cent in fiscal year (FY) 2008.

The grim scenario is not just for India, the concern is really global. IMF in its recent report has stated that the global GDP growth is expected to slow down in 2008.

As for the market, expect volatility to continue and it is still wise to stay away from the market. More bad news is expected to come from the write-offs made by US financial giants. UBS recently writing- off of about USD 19 billion was much more than what the market had expected. Many more such with write-offs are expected.

Add to this the public acknowledgement of Ben Bernanke, the chairman of the Federal Reserve, saying that the economic outlook has weakened significantly in recent months. In a testimony before the Joint Economic Committee, the Fed chairman said that the economy "Will not grow much, if at all, over the first half of 2008," he said, and "could even contract slightly."

Therefore, the road ahead is tough for the market both from the domestic and global fronts.

Once again it is the season for corporate results. Companies will declare results starting next week. Once again expect the market to behave erratic in response to corporate numbers. The preview published by many analysts about the Sensex-based companies suggests that there is a risk to earnings in most of the sectors given the uncertain global conditions and weaker than expected growth in India's GDP.

Considering all these factors, the sense we get is volatility will be part of the market in the week ahead with the market moving with a negative bias. Most companies are expected to announce guidance for next year and it is likely that the market may take a cue from it. Hence, it will be a prudent strategy to stay away from the market for a while.

Source: Flash News, Vol. 24-No.1; Dated April 7, 2008