ithought market wrap No. 43, 16 Aug 2011
Inflation is a wild thing. Stoking it is a nightmare for central bankers. The only tool in their hand is the interest rate. They have little option but to raise it periodically and see how prices behave. They also must keep praying that supply of goods and production of commodities improves so that it exceeds demand and help prices soften. The RBI is acting – 12 rate hikes in 18 months and borrowers are breathing heavy under the rising burden of interest. Lenders, principally banks, are seeing NPA’s rise on the one hand and the value of their bond portfolios depreciate. The profit statements of banks are definitely not going to look respectable. The stock markets only know this too well and investors are unsure when the inflation fires will be stoked. Once inflation decisively reverses, interest rates will follow. Stock prices await the trend reversal. In the interim, contrarians gather strength and money to buy stocks cheap.
Currency fluctuations have returned to haunt Indian markets. The sharp rise in the dollar has surprised everyone and caught many unawares. FII selling is also hurting the rupee as demand for the dollar is rising. With no sign of reduction in oil prices, India will see its macro numbers affected by the rupee’s weakening vis-a-vis the dollar. The RBI will have several fires to fight on different fronts. Inflation worries, rupee depreciation and currency outflows due to FII selling will keep the Central bank busy over the next few months. The second quarter results will be keenly watched and advance tax numbers of leading corporate indicates that things aren’t really too bad. The markets will spend the next few weeks tracking global developments closely and the Q2 results season will be the next trigger for stocks to be re-rated one way or the other.