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Stock markets: Are we alone?

Apr 5, 2004

Reporting the largest payroll growth over the past four years, a US labour statement announced last week that non-farm payrolls in the country have increased by 308,000, much higher then the projected increase of 123,000. While this marks a turn from what has been the situation in the past year (see the graph below), sustainability still remains a concern.

If the Federal Reserve (the Fed) takes serious note of it and that the following months present a continuation of high growth in payrolls, it could have some impact on the Indian economy, both positive and negative.

The first and the foremost result of sustainability in rising payrolls would be the addition to the US consumer base, which has carried the economy through thick and thin in the past. And if output fails to grow in line with growth in the consumer base, it might lead to an inflationary situation in the US. This might then lead to the Fed changing its stance on the interest rate policy. Raising overnight interest rates, which are currently at their 45-year lows at 1%, might then be the Fed's first reaction to the improving employment situation.

The improving employment levels would certainly help the cause of the US stock markets, as investors would vouch for an economic recovery that would help grow earnings of US corporations. However, as far as the Indian stock markets are concerned, there might be a reversal in the movement of Foreign Institutional Investors (FIIs) inflows into the country. Foreign investors might then invest in US treasury bills and bonds that are considered to be the safest in the world. This reversal of FII inflows, even if marginal, could have an impact on the Indian markets that have shown a strong correlation to these inflows in the past.

However, there might be one positive consequence for India from the improvement in the US employment levels. This might soothe tensions that have been created in recent times owing to offshoring by US corporations. Sustainability in the US economic recovery would create new jobs. However, despite the improving economic situation, corporates are likely to focus on the costs side. Therefore, outsourcing is a long-term reality. And India, with its low-cost and high quality offerings, would continue to be one of the first choices of the US corporations as far as the services aspect is concerned.

All said and done, everything doesn't seem to be as easy. There are several factors that might derail this recovery process. Firstly, the recent blasts in Madrid have indicated that terrorism is now a global concern. Governments and investors would continue to be apprehensive regarding the re-occurrence of this dreaded menace. Then, there are concerns regarding the slowdown of the Chinese economy, which could impact demand. Over that, the hardening of oil prices is also a cause of concern. Whatever impacts the global economy also impacts India. In this context, it is important to bear in mind that we are not alone!

Keeping these fact in mind, and that the Indian markets are highly integrated with the global markets, investors have to exercise caution. A stable government at the Centre, post the elections, is of significance to keep the momentum going. However, there might be certain impediments, as mentioned above, in this process.

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