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And the wait continues

Jul 14, 2004

Markets traded in a narrow range for most part of 1QFY05, waiting for the Finance Minister (FM) to provide the necessary trigger for <>Indian stock markets. However, despite the budget being history now and with most budget proposals having gone down well with the industry, the indices have remained range bound.While the near-term indecisiveness could be blamed on the turnover tax issue, which has taken the markets by storm, despite our belief that it (along with 10% short-term capital gains tax) is in the larger interest of investors, there are actually many more uncertainties pertaining to our economy that have cropped up.

On the economic growth front, the budget has envisaged a 7%-8% sustained growth rate with the fiscal deficit having been pegged at 4.4% for FY05. This target can be achieved if the rain Gods bless our country this year also. However, as per initial reports, the delay in monsoons is becoming a cause for worry. It must be noted that a normal and a well-spread rainfall is necessary for our economy, as we are agricultural dependent. In the event of monsoons providing a setback, it would put doubt over India's growth prospects in the near-term.

The point with respect to the importance of monsoons is also explained by the Deputy Governor of the RBI, Dr. Rakesh Mohan, in a very recent interview with us, wherein he said, " achieving the objective of achieving 7%-8% plus growth in the medium term, we need to understand that it is very difficult to do it if the medium term potential growth rate of the agriculture sector remains at 2.5%-3%. So, if you are ready to achieve 7%-8% growth in the medium and long-term, then we need to understand that agricultural growth needs to be higher than what it has been for decades, which is 2.5%-3% average growth." He also added, " achieve 7%-8% plus long-term economic growth, you can't get it unless there is 8% plus growth in other sectors... for the other sectors to grow at higher rates, the vast buying power with 60% of people engaged in agriculture (needs to be harvested) so that the other sectors could grow faster if the agriculture sector grows faster."

Another factor that has been forcing market participants to stay on the sidelines is concerns regarding any rollback of budget proposals (like the hike in FDI limits in sectors like telecom, insurance and aviation). It must be noted that these are mere proposals and will be laws only after the Finance Bill is passed. However, with Left parties (part of the current Congress-led coalition at the Centre) already making uncomforting statements with respect to their non-support to the Finance Bill owing to the above issue, this matter gathers importance. Though India has had a history of rollbacks, any retreat by the FM could impact confidence.

While we reckon that all of the above matters (and many more) would soon be resolved, there is no guarantee that something new will not come up. Currently, it is the turnover tax and FDI limits that are playing at the top of investors' minds, which would soon be overtaken by monsoons and India Inc. results. Thus, there will always be something or the other for which the markets would continue to wait. The fact remains that there is really no 'big' trigger in sight for the stock market in the near-term. In these times, retail investor must note that there are good companies/sectors available at descent valuations from a 3-year perspective at current levels. Identify those and invest in a staggered manner so that the risk is distributed over a period of time.

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