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On This Day - 12 AUGUST 2009
A mistake that could wipe out your returns
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However, not all are convinced. Some believe that the dollar's rise just as in the month of May is a temporary phenomenon and the dollar is likely to remain under pressure till Fed raises interest rates, something that is not going to happen at least until 2011. Clearly, with the US not likely to turn into trade surplus anytime soon and with its assets not expected to generate substantial returns, interest in the US dollar is likely to be speculative at best.
How long this performance sustains is difficult to say given that erratic monsoon rains could impact demand over the next few months. This is considering that rural demand, which accounts for more than half of country's domestic consumption, is expected to be severely impacted on the back of below normal monsoon. We keep our fingers crossed!
So, what has made the Finance Minister so sanguine despite growing worries in the agricultural belt? One is that central agencies like Food Corporation of India have buffer stocks of over 50 m tonnes of rice and wheat; two crops which have been badly hampered by lack of adequate rainfall. Also, his confidence that the government is prepared to handle a drought and that a contingency plan is also in place which would include adopting measures such as allowing import of foodgrain, continuing with the ban on exports and asking state-run agencies to buy more stocks from the open market. We certainly hope that the government's confidence is well founded. After all, India is barely limping back to some semblance of normalcy after putting the global crisis behind it. The eruption of swine flu is also casting a pall of gloom. This means that the government will have to do all in its power to make sure that these phenomena do not deal a huge blow to India's growth. A very challenging task indeed!
As per reports on Bloomberg, it was China's record coal and iron ore imports in the first half of 2009 that helped the index to advance almost five times this year, thus reversing a part of its devastating 92% collapse in 2008. But now, the culprit for the recent fall may have also been China, as the country saw a slowdown in new bank loans in July.
Experts are of the opinion that the enormous stimulus packages unleashed by the Chinese government have encouraged more fixed asset investment at a time when the need of the hour was perhaps to reduce capacity. Thus, as the effect of the stimulus packages wears off, the realities of excess capacities will dawn on corporates, forcing them to go slow on them and thus, leading to a slowdown in investment led GDP growth. Furthermore, the possibility of a second stimulus package by the Chinese government seems limited because the country's fiscal sustainability is less strong than it appears. A second package is only likely to make it even worse. Indeed, testing times ahead not only for China but also for the rest of the world as another of its growth engine starts to sputter.
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