May 20, 2004|
Await further clarity
Finally India is set to see its 14th Prime Minister today, exactly seven days after the poll counting began. Though a span of seven days might look very small but in the interim, Indian stock markets made history by losing more than 10% on a single day (17th May 2004). If we were to watch it closely, it was mainly due to political uncertainty prevailing in the country during that period. The Foreign Institutional Investors (FIIs) trends are also discouraging for the markets as in the month of May till date, there has been net out flow of US $ 661 m from equity markets.
But with things becoming relatively stable on the political front, markets have recouped some of the losses in last two trading sessions and have again reached 5000 levels. Reserve Bank of India's monetary policy, which has maintained the status quo on interest rates, has also helped the markets by keeping interest rates on the lower side, ensuring cheap credit availability for companies to further their expansion plans. The RBI's projection of GDP growth of 6.5% to 7% is an indication that India in going to be one of the fastest growing economies in the world.
So is this enough for investors to take fresh exposure in the markets? We believe not quite as yet. Investors will have to keep certain things in mind before making any kind of decision like:
Would the newly formed government be able to provide political stability to the country? What will be the stand of government towards the reform process? Will they be able to increase the pace of reform implementation or will it slow down because of different political agendas of the coalition partners. Though the early signs toward reforms are not encouraging, it should not be forgotten that the victorious party is the one that is considered to be the architect of reforms in the country.
With Crude prices at 13 year high and likely to strengthen further with high demand from US and other developing nations, the higher import bill of crude is likely to have a negative impact on the fiscal state of the country (higher deficit). Thus it can lead to interest rates rise going forward as government raising more money from markets.
If government decides to pass on the effect of higher crude to the consumers, then their will be an upswing in the inflation in the country from the current expected 5% levels. In order to control higher inflation, government will have to strengthen the interest rates in order to keep under certain levels. Rise in interest rate will slower down the demand of housing, consumer durables and others to some extent. Just to give an example, a 1% change in interest rate (from 7% to 8%) on a Rs 5 lakh housing loan for 20 years will increase the EMI payment by around 8%. Thus looking at the percentage rise in the EMI outflow every month, the consumers may defer their demand to an extent.
Higher interest rates are also capable of diverting equity market funds to debt markets, as investors may prefer risk free government bonds as compared to high-risk equities. Further any rise in the US interest rates may see a shift of FII money from Indian equity markets to US debt funds.
We would like to conclude by saying that it is too early to form any kind of opinion about the government before it takes the charge. Investors should look forward to the Common Minimum Program, which will give a broader picture of government's direction of work. Once the confidence in the new government policy start coming, markets may witness fresh investments from the global investors. But it will definitely take some time. So short-term trends should not form any kind of base to form expectations from markets for the long-term investors.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
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. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. 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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407