Economy & Finance

Fed rate cut

The FED has cut interest rate by 0.5%. This was an unexpected move for the major players in the money market who were expecting 0.25% cut in the rate. Due to this rate cut and other add on factors, the US dollar has weakened in the world market. It has further weakened against the Indian rupee and is below Rs. 40/- level, which is the lowest level in the last 9 years.

Due to the weakness of dollar, the foreign institutional investors in the Indian stock markets are benefiting substantially. Their investments in India are appreciating in rupee terms due to economic growth and expectation of good corporate results. They are further gaining in US dollar terms due to appreciation of rupee against the US dollar. The FIIs are aggressively investing in India and other developing countries and these markets are expected to give them better returns than the markets in the developed countries.

The interest rate cut by the US Central Bank has both positive and negative effects, specially on Asian economies including India. The export of these countries to US, who is the largest importer of their goods and services, may slow down thereby causing negative impact on growth. However, funds will flow from US markets to these economies, which can add to the boom of stock and property markets. This inflow of funds will lead to high liquidity in these economies and it can add to inflationary pressure.

Most of the stock exchanges across the globe have greeted the rate cut with enthusiasm and stock market indices across the globe, including in US, have appreciated. It is hoped that this rate cut may be able to avoid the recessionary conditions in US economy.

The sub-prime fears are left behind, but the world markets are still not out of the crisis. As the world is facing boom conditions for last few years and as there is no major let-up in growth, the investors are disregarding even the negative news and stock markets are remaining put on upward movement. We can only hope that the partly will last longer and longer and there are no surprises.

The outlook of Indian economy is very positive. The speed of economic growth may slow down a bit, but still it will give strong numbers. There are no major threats to the good times in India. The stock markets are doing great. Property prices are going reasonably strong, though they might have reacted in certain pockets. Reserve Bank of India has been able to control the inflation, by keeping the borrowing cost high and not allowing the liquidity to expand beyond reasonable limit. The feel is good and expected to remain good, irrespective of looming political uncertainty.

Stock markets

After the initial threat from sub-prime debt fallout, the stock markets across the globe have rallied. The markets in developing countries have done even better. The Indian stock market has crossed its previous all time high. Nifty has crossed 5000 mark and Sensex is racing towards 18000 levels. In the month of September, there has been huge inflow from foreign funds amounting to about 3.5 billion dollars in the stock markets, which is an all time record. Though domestic mutual funds have sold stocks and booked profits, the money power of the FIIs has bulldozed the market and they have rallied at a very high speed. The PE of Sensex has crossed 24 and that of Nifty has crossed 23. They are not low by any means, even factoring the high growth of Indian economy.

Experts were predicting a correction, but the sheer money power of the FIIs has proved them wrong. The feeling is great for the FIIs, who have made money. Many small, cautious investors and even mutual funds to an extent have been left behind and are repenting for not being aggressive. Now, I feel that the market has reached to a level where we need to be cautious. At Sensex level of around 18000, investors should book at least 20 per cent profits. October is the month of quarterly results and there can be surprises. Substantial positive news has been discounted in the stock prices, but negative surprises can lead to a fair fall. It is better to book partial profits and hold the liquidity for riding again after a correction. If the correction does not materialise, the investors may get in again in the month of November, when a clearer picture emerges after the quarterly results. Software sector and export oriented companies may suffer undue setback, if they cannot pass on the burden of dollar depreciation to their customers. Import oriented companies and companies holding large foreign debts will immediately benefit. This factor needs to be considered while selecting stocks from a portfolio for booking profits.

Property market

The property market in India is stable. In the major prime locations it is holding on well, but it has probably peaked out, in many towns. The stocks of property companies are still booming selectively. Though I am not bearish on property market, the times of great appreciation may be over. This may be the time for consolidation. If stock market reacts and economy slows down, there can be a start of downtrend in property market. Investors need not disinvest but should remain cautious and may refrain from committing excessive new exposure on this sector. The boom in rental market will continue to give good returns.

Gold and silver

The gold has become strong in global markets and it can be still stronger. It has not appreciated that much in rupee terms, as rupee has substantially appreciated against the dollar. But for that, gold would have crossed 10,000 rupee mark. I will not be surprised if the gold becomes stronger in rupee terms and cross the level of 10,000 in the near future. Profit booking is advised only above that level. Silver will remain strong in tandem with gold, but gold seems to have better potential for gain.

Debt

Debt market has remained steady over the last one month, in spite of FED rate cut. There is some expectation of softening, but I do not expect major rate cut in near future. Investors will do well to remain invested in fixed interest earning, deposits and securities and also in debt oriented mutual fund units. Even fresh allocation should be made at predetermined ratio to current savings.

Foreign exchange

In the last few months, RBI has liberalized forex transactions as never before. Those investors who have purchased foreign exchange assets, have not gained but have lost in many currencies, due to the strength of rupee. The current government policies, as well as economic growth of India, have all the fuel to keep the rupee strong and make it even stronger. The foreign fund inflow is adding to the upward pressure. Investors are advised to exercise caution while taking foreign currency exposures, as their chances of gaining in arbitrage is very limited in the short term.

Caution