Has the worst market scenario been discounted?

Couple day’s back I was reading business line, in which I got this article from Sudip bandyopadhyay CEO, Reliance Money. It talks about inflation, its controlling, growth and etc. So I am posting this article for you guys, good article read it and revert back to me…

John Maynard Keynes famously said, “In the long run we are all dead”. Defenders of markets sometimes admit that they do fail, even disastrously, but they claim that markets are “self-correcting”.

During the Great Depression, similar arguments were heard: governments need not do anything, because markets would restore the economy to full employment in the long run. But, in the long run, we are all dead. Markets are not self-correcting in the relevant time frame. No government can sit quiet when the country goes into recession or depression, even when caused by excessive greed of bankers or misjudgment of risk by security markets and rating agencies. But if governments are going to pay the economy’s hospital bills, they must act to make it less likely that hospitalization will be needed.

Containing inflation in India is not a matter of choice for policy makers; rather, it is a matter of necessity. Rising prices affect a vast majority of the population. Therefore, it is imperative that the policy makers take all possible steps to curb its further rise. Given the predominantly monetary phenomena that it is, the RBI is the first stop for the policy makers to address this issue. Hence, tightening the monetary policy — by tightening liquidity in the market — is certainly a move in the right direction.

Commodity prices are coming down from their peak of a few months and this may bring inflation down. For the government, here is a chance to catch up with the absurd deficit on the oil account. However, much more needs to be done to impact the supply side of the problem as well. The public distribution system (PDS) is in disrepair and requires significant improvements in the form of greater transparency and accountability.

The markets witnessed significant bouts of profit-booking last week following which one saw the broad indices closing in negative territory. Two important events which the markets were expecting this week included the IIP numbers and the SEBI meeting to discuss the P Notes issue. Both of them did not spring any negative surprise and were on anticipated lines.

However, what spooked the market was the negative surprise coming in from a sharp rise in inflation to 12.44% as compared to 12.01% earlier. This is reportedly the fastest rise seen during the last 16 years. The market was also concerned on the news that the government has finally decided to pay 21% more than the proposed pay panel recommendations to central government and railway employees.

Meanwhile, the Prime Minister’s Economic Advisory Council (EAC) has clearly mentioned that the GDP growth during FY09 is likely to slow down to 7.7% against earlier estimates of 8.5% — with agriculture growth pegged at 2% during the current year against 4.5% recorded last year. Some of the important concerns raised by EAC is the alarming rise witnessed in off budget expenditures, especially pertaining to fertilizer subsidies, oil bonds to OMCs which taking in to account all other such expenditures could touch 5% of the GDP. This is over and above the budgeted fiscal deficit of 2.5% during 2008-09. EAC has also warned that inflation could further spike to 13% before it peaks out. It also expects the tight monetary stance from the RBI to continue before results get reflected, with the annual inflation targeted at 8-9% by March 2009.

Some positive news which flowed during the week included the indirect tax collections from excise and customs duties increasing by 13% in July ’08 and by 12% on a cumulative basis during last four months ending July ’08 of this fiscal. On the crude price front also, OPEC has further cut its forecast for global oil demand growth in 2008 and expects production more than adequate, signaling a more comfortable supply and demand balance scenario.

It is expected that during this week, one could witness a small knee-jerk reaction initially due to several negative macro headwinds but thereafter, there is a strong possibility of some sustained value buying coming in from funds and long term investors, since it seems that the worst scenario has already been discounted in the stock prices by the markets. The market is also eagerly awaiting the reforms promised by the finance minister after the government won the trust vote last month. Any positive news on that front should boost the market sentiments.