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US terror: Era of uncertainty

Sep 14, 2001

The tragedy in the US has paid put to any hopes of a revival in the global markets, which were anyway struggling with the bear phase. The current crisis is most likely to adversely affect world economies in many ways. We look at some fallouts of this tragedy and their affects on India and the world. With fears that retaliatory measures are most likely to be directed against the Middle East region, oil prices are steadily moving up. This is likely to inflate the oil bills of importing countries. For India, this is bad news. Already there was speculation that the government may not keep the April 2002 deadline of APM dismantling owing to the surging oil pool deficit.

US accounts for 22% of the world’s GDP. In the last year the country has been struggling against an economic slowdown. It has seen seven rate cuts since January 2001. Technology majors have struggled and profit warnings have become a norm. Job cuts continue to hit headlines but consumer spending continues to show strength. The question remains, for how long? The WTC tragedy is most likely to discourage spending, as consumer confidence could be affected in the near term. This means even more bad news for retailers and other old economy companies.

The US has also indicated that it will up its defence budget. In a scenario where its economy is already under pressure the money could find economically more productive uses. To counter this, the Fed is once again expected to cut interest rates. But this continued rate cut might lead to an imbalance in the economy, which may present its own set of inflationary pressures once the economy comes back on track.

However, as things settle down, this may also mean that companies, which lost their offices at the WTC, would rebuild systems and infrastructure and may create some demand for the service providers. But their scale of demand is unlikely to swing the scale to positivism.

A lot of these companies would also file claims for insurance, which experts fear may run into US$ 20- US$ 30 bn. Insurance is big business in the US and insurance companies actively invest in the stock market. Warren Buffet’s Berkshire Hathway is one prime example. This may again lead to pressure on the markets. And if the Wall Street is under pressure, Indian tech companies mirror that sentiment.

Since the US regulators have given the small investor the priority to exit first and have asked bigger investors not take advantage of this situation, institutional investors may look at other avenues for liquidity. This morning we have already seen some selling by the FIIs on the Indian bourses. This may or may not continue depending on the US course of action.

On the domestic front, our foreign exchange reserves are at a healthy US$ 45 bn. Our short-term foreign exchange debt is around US$ 3.4 bn. So this is not a crisis scenario for India atleast in the current circumstances.

Sectors like auto are already beginning to show signs of revival. More sectors may follow suit in the months to come. However, in the next few days the bourses are unlikely to follow the fundamentals in the wake of the prevailing uncertainty.


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