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Which fear is gripping Indian investors? - Views on News from Equitymaster
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  • Jun 13, 2008

    Which fear is gripping Indian investors?

    Friday the 13th is probably the most common of all superstitions. The fear of bad omen on Friday the 13th is so widespread that phobia related to this day grips some 60 million people across world. According to the Stress Management Center and Phobia Institute in Asheville, the fear of this fateful day is known as psychological disorder 'paraskavedekatriaphobia'. People suffering from this disorder are so paralyzed by fear that they avoid their normal routines like doing business, taking flights or even getting out of bed. The psychology of fear is one of the most destructive energies that rob emotions. This fear psychosis seems to be gripping many Indian investors in recent times for a number of reasons that we have analysed here.

    The fear of global slowdown
    In last six months, financial markets have experienced turbulent times, which have marred investor sentiments. The sentiment has shifted from greed to fear. Every second news is conceived to be bad news. Crude prices are going up, inflation is soring and interest rates are moving up. Investors have for the past few months picked their business dailies everyday to read about the onset of a global economic slowdown. But should the global financial market scenario really worry a long term Indian investor? The answer to that is 'no'. The fundamentals of Indian economy has not changed.

    Over the last five years, the Indian economy has grown at an average rate of 8.7% per annum and going forward real GDP growth has been estimated to be in the range of 8% to 8.5% for the year 2008-2009. Although there are growing concerns about global factors, one needs to keep in mind that India's growth is mainly driven by domestic demand and supply factors. The gross domestic savings is currently around 35% of GDP. This indicates the sustainability of economic growth.

    The fear of inflation
    The second major fear for investors is soaring inflation. But as per Reserve Bank of India (RBI) indications, the currently high level of inflation may start moderating noticeably as monetary, fiscal, and administrative measures impact the economy and other seasonal as well as global factors turn favorable. In the monetary policy, special emphasis is given on liquidity management. The annual monetary policy plans for a reduction in the rate of money supply in the range of 16.5% to 17% in FY09. This will help in controlling inflation going forward.

  • Investing in inflationary times

    The fear of stagnation of the Indian economy
    The recent data released from the Ministry of Statistics and Programme Implementation indicates growth in the Index of Industrial Production which was registered at 7% in the month of April 2008 YoY, which was higher than the earlier growth of 3.0 % during month of March 2008 YoY. In terms of industries, as many as 14 out of the 17 industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of April 2008 as compared to the corresponding month in 2007.

    These data show that although there are some problems prevailing in short term on the back of turbulant global markets, in longer term the Indian growth story is intact. Investors should also not get worried about foreign investments. The FDI inflows in FY08 saw an increase of 56.5 % over US$ 15.70 bn dollars in the previous year. India remains attractive destination for investment. FDI inflows reflect confidence in long term India growth story.

    What should investors do?
    The moot question is how can you cope with market fear, and start investing in turbulant times? It is at these times that the long term investors investors can be distinguished against the speculators. A good understanding of the businesses that one is buying into and a careful analysis of the valuations should be sufficient for retail investors to arrive at an investment decision rather than worrying about weekly and monthly economic statistics.



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