Not a smooth ride for the markets

November 11, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

There was subdued excitement over the Sensex hitting a record high in a special trading session on Diwali. It had taken the market quite some time to cross its previous peak in 2008. This was also the case for most other markets, although they had recovered a little earlier.

The Indian market was slow to catch up because, apart from the international conditions, there were domestic problems that affected the health of the economy.

The fundamentals of the Indian economy were weakened, undermined by a number of imbalances. Inflation has been beyond the Reserve Bank of India’s (RBI) tolerance limits for more than three years now. A bloated current account deficit took the exchange rate to around 69 to the dollar. The budget deficit and tax proposals vitiated the business climate for FIIs and FDI. Governance left much to be desired and investment was held up. As a result, GDP growth nearly halved to 4.8 percent.

The market had received several knocks off and on. Essentially, the Sensex dropped too fast in earlier years and climbed back too slowly to its earlier peak.

What’s more, it will not be a smooth ride from now onwards, because neither the domestic nor international conditions are conducive for the market.

In the global economy, Europe is riddled in semi-recession while the United States and Japan are still not able to get back to stable growth. Quantitative easing (QE) had also funded, apart from the United States, markets in emerging economies. These are now too sensitive to QE and any threat of tapering causes the markets to retreat. It now seems that tapering will be delayed at least until December. That gives emerging markets some breathing space.

But the Indian market has its own worries. That’s because basic imbalances are yet to be corrected. The main weakness is inflation, which forces the RBI to maintain high interest rates and killing industrial growth. Rarely at any time in the past has industrial growth stayed so low for so long.

Investment is shrinking and the capital goods industry was forced to cut down production. The rupee has perhaps achieved temporary stability, because the trade deficit has been down since industry-related imports have not picked up.

More than that, the market has been overshadowed by the 2014 general elections. Uncertainty about the next government and future policy priorities has nearly stopped new investment. Until May, the market will move unsteadily and the Sensex will possibly be found much of the time in the 20,000 – 22,000 range.

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