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What's stockmarkets' biggest fear?

Aug 10, 2009

After last week's drubbing, stock markets across Asia have opened this Monday on a strong note. Major gains are currently being seen in Hong Kong (up 2.2%) and Japan (up 1%). As reported on Bloomberg, these gains are on the back of a slightly positive US employment data released late last week and improvement in machinery orders in Japan. How the Indian markets behave after last week's poor run remains to be seen. This is especially considering that news on the agricultural front remains weak on the back of poor monsoons. The drought situation has become so grave that Prime Minister Dr. Manmohan Singh has himself asked states to immediately commence relief operations while acting upon contingency plans for crops, drinking water, and human and animal health.

Dr. Singh has also warned that shortfall in sowing of the kharif crop was bound to increase inflationary pressure on prices and states needed to keep a sharp eye on availability of food grains and essential commodities.

As a matter of fact, rains in the month of July, which is generally the wettest month in the June-September monsoon season, were 98% of the long-term average, and higher than the forecast of the Indian Meteorological Department. However that wasn't enough to make up for the 52% shortfall in June.

These issues place the Indian economy in a precarious position given that there remains a strong linkage between the monsoons and economic growth. In absolute numbers, a vast majority of Indians are still dependent on agriculture and much of that is still driven by monsoons. In such a scenario, a worsening food crisis can definitely spook a fledgling recovery that had just started to take wings.

What impact this can have on investments remains to be seen although stock markets cannot do without taking note of this situation. Last week's sell-off was probably just a reminder that all's not well out there.

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