Is India staring at low growth plus high inflation? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Is India staring at low growth plus high inflation? 

A  A  A
In this issue:
» Rising wheat prices - India partly to blame
» China could crash, says Marc Faber
» Global factory output is witnessing a slowdown
» SEBI wants to check price rigging
» ...and more!!


-------------- Become our Fan on Facebook and get a Thank-You gift --------------
On 10th August, at 10 am, we will launch our brand new investment guide, What the Charts Foretell, on how to understand the stock market better.
And we will launch this guide only on ...Yes, you guessed it right - Facebook! So become our fan and as a thank you gift, get this guide FREE. Quick! Just Go to Facebook. Click on the "Like" button and Become a Fan of Equitymaster now!

-----------------------------------------------------------------------------------

00:00
 
India's central bank, the RBI, has received a lot of praise in the past. After all, its policies and independent thinking ensured that Indian banks did not suffer the same fate as their Western counterparts.

India, infact, recovered strongly and since then its GDP has been growing nicely. And the government is aiming for growth in double-digits. But the scenario may not be as hunky dory as it seems. This is because India has a much bigger problem to deal with i.e. inflation. Food prices in the past one year have stubbornly refused to cool down. Non food prices are also now seeing a rise in prices.

So, how has the RBI been dealing with this issue?

It raised the repo and reverse repo rates in its recent monetary policy. The CRR, however, was left unchanged. And more hardening of interest rates would ensue. But is this enough?

After all, the two most relevant rates, the repo and cash reserve ratio, are still considerably below where they were before the central bank started slashing interest rates in late 2008. Further, the government has raised the tolerable wholesale price inflation rate to 6%. This limit was 5.5% in April and around 4% a couple of years ago. Thus, rather than bring inflation down, the government is finding it easier to conveniently readjust its 'comfort' level. This hardly expresses efficiency on its part.

At the height of the crisis, the central bank relaxed rates and pumped in stimulus measures to fuel growth. But the problem is that when it came to withdrawing these measures, it has not been nimble and aggressive enough. Unless the RBI really goes on the frontfoot, India will have to deal with what is known as stagflation - low GDP growth coupled with double-digit inflation. Not a promising prospect indeed!

01:18  Chart of the day
 
India's exports faced heavy weather in 2008 and the first half of 2009. That was when the financial crisis was at its peak. And so, dampened demand in the rich world meant that India's exports were hit hard. But come November 2009, and things started taking a turn for the better. As today's chart of the day shows, India's export growth has witnessed a robust recovery although the pace of this growth has slowed down in recent months. Imports, meanwhile, have also increased and because of this the trade deficit has not really reduced.

Data Source: CMIE

01:54
 

Image Source: Wall Street Journal
Food crisis was the buzzword in 2008. Led by rising prices of food grains, there were riots across countries. The US President even blamed people in China and India to have caused the crisis, given the rising consumption levels in these countries! Then came 2009 when, led by a global economic recovery (sort of), noises against rising food prices went silent. Now in 2010, fear mongers have raised their heads again. And the matter really seems serious.

Take the case of wheat, whose prices are expected to surge led by a global shortage of the commodity. The Wall Street Journal reports that global wheat prices have staged the most drastic rise in more than 50 years. This is on the back of a drought in Russia that has fueled worries that it could lead to a global shortage of the grain.

India, world's second-largest wheat grower, can be part of the blame for rising wheat prices as well. And the blame lies on the poor storage facilities that have led to tonnes of wheat rotting under open skies. The rotting grains have contributed to India's rising food prices. Wheat prices in the country have risen by around 12% per 100 kilogram in the past three months alone!


02:38
 
Stock prices are something that we tend to take for granted. Indeed, they serve as our reference points. They help us determine whether a stock is going too out of line or falling too much from a given price. It will not be an understatement to say that stock prices are certainly our guiding lights. Thus, imagine what would happen if there are no stock prices that we can relate too. Imagine a priceless stock that is likely to get listed on the bourses and whose price is likely to get determined by the investors only at the end of the day. This would indeed be a stock manipulators dream come true. In the absence of any historical pricing data, they could send the prices soaring and then bring them down with equal alacrity.

There have already been a few instances in the Indian stock markets in the recent past. And this certainly has our market watchdog SEBI worried. The SEBI wants to bring in a mechanism that could check price rigging in cases where the stock is being listed after a long layoff.

As mentioned earlier, such stocks are fertile grounds for manipulation on account of absence of recent price history. And this could thus end up hurting the retail investor. Fixing price bands before hand was considered as an option. But it was being felt that this was coming too much in the way of honest price discovery mechanism. However recently, a call auction was proposed. Here, price gets discovered in the first few minutes of trade after matching all the buy and sell orders. Hmm, yet another retail investor friendly step by the SEBI we should say.

03:21
 
The crash is imminent. And once it is here, it could impact global growth. No we are not repeating the forecast about the double dip recession in the US, or even its repercussion on the US stock markets. Instead these are the views of eminent investor Marc Faber on the Chinese economy.

Faber believes that the Chinese markets are discounting the slowdown in economic growth too soon. Also that the Chinese property markets could lead the bubble to burst. "China could crash" is Mark Faber's latest predicament in an interview to Bloomberg. A crash in Chinese stock markets could send investors to other emerging markets like India in search of better returns. Having said that, a crash in commodity prices could bode very well for the future profitability of Indian manufacturers.

03:47
 
The US is often said to be in a 'recovery'. But according to its Federal Reserve chairman Ben Bernanke, a full recovery is anything but close by. In a recent speech he is known to have said that the US still has a considerable way to go to achieve a full recovery. More so considering that many Americans are still grappling with unemployment, foreclosures and lost savings. The pace of the US economy's growth slowed from a rate of 3.7% in the March 2010 quarter to 2.4% in the June quarter. Not a very encouraging sign. Many US state and local governments in different parts of the country remain in a dire fiscal condition. The US stockmarkets have seen a swift recovery from the crisis. Seems like the real economy is not about to follow anytime soon.

04:16
 
If the West was holding on to any hopes of an economic recovery, it now seems more distant than ever before. As reported by the Financial Times, a survey of purchase managers indicates a slowdown in global factory output. Even if one were to concede that the global recovery showed promise earlier this year, it was lopsided. The pattern of industrial output was similar to imbalanced economic growth of the decade before the global financial crisis. Europe remains largely dependent on German manufacturing. As far as Asia is concerned, a economic growth is likely to slacken as governments cut back on fiscal spending. However, it is likely that they would continue to outperform because they generally did not have debt problems and their banking system remained healthy.

04:41
 
The Indian stock market had a volatile trading session today led by alternate bouts of buying and selling across index heavyweights. At the time of writing, the BSE Sensex was trading higher by around 21 points (up 0.1%). Gains were largely seen in oil & gas and banking stocks, while IT and FMCG stocks were at the receiving end.

04:56  Today's investing mantra
"Individuals who cannot master their emotions are ill-suited to profit from the investment process." - Benjamin Graham
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Were You Lured By Mr Market's Bait?
August 23, 2017
Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

Equitymaster requests your view! Post a comment on "Is India staring at low growth plus high inflation?". Click here!

  

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407