Indian Markets: Total Crisis of Confidence

by Jawahir Mulraj

RBI Governor D. Subbarao’s viagra infusion of Rs 100,000 crores in liquidity through 3 cuts in CRR, followed by a cut in the repo rate, failed to raise the Sensex. Nor did efforts by the Finance Minister and the Prime Minister to instil a measure of confidence through assurances that all was well with the Indian economy.

The BSE Sensex nonetheless fell a whopping 1274 points, to end the week at 8701. The only thing that went successfully up was Chandrayaan, launched by ISRO. Maybe attempts to hitch the Sensex to the rocket headed for the moon may have helped it.

There is a total crisis of confidence and even at bargain basement prices, investors are too scared to invest in equities in fear of worse times ahead. Macro economic indicators and forecasts are gloomy. The rupee has fallen to over 50 to the US $.

Inflation, though falling, is still in double digits. GDP growth forecast for the current year is now at 7.5% (and further down to 6.6% for 2010), largely thanks to the services sector which accounts for some 63% of GDP. But in several service sectors, such as airlines, there is a sharp slowdown and a contraction; senior staff at Jet, e.g. are facing a pay cut of 30%. The Finance Minister has admitted inability to contain fiscal deficit within the target set under FRBM; Goldman Sachs (GS) estimates it to increase to 8.4% of GDP.

Infrastructure, which needs an investment of $500 b., is an area where a Government push would help sustain the economic growth, were it not for the fact that it has been foolishly profligate in using tax resources generated during boom years. The Government has done nothing to develop a vibrant debt market, one that, by establishing a yield curve, would enable infrastructure projects to obtain long term funding, instead of relying, in its absence, on medium term funding which is rolled over. The credit crisis makes it very difficult to roll over whilst retaining viability of the project.

Comments

[jepittman:]

The Indian markets will recover when Asian markets recover and the Asian markets will recover when US markets recover. One of the myths that this crisis has debunked is the one of non-correlation. IMO the resolution of the crisis resides in the US where it began.

2008 Nov 09 12:59 PM