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| BSE Sensex June 21-28, 2011, Google Finance |
We have clocked 3 days of super-normal uptick in Indian stock markets. Just as I was not clear about what spooked the Indian markets a few days before on June 20th, I am not sure what has gone right since that time.
I think, with respect to Indian markets, we are entering a period of volatility in the Indian markets. The reasons are plenty.
First, it is now a consensus view that inflation will move to double digits soon. What is not understood is real life meaning of this stubbornly high inflation extending beyond two years now. The price acceleration that is implied by continued higher inflation will either impact corporate margins, or impact demand i.e. revenues, or both. To complicate matters further, the investment required for supply-side easing are not coming through. Corporate India is reluctant to work on their long term capacity addition plans. This is clearly not a situation where markets should be heading higher.
Second, there is impending specter of Euro-crisis going out of control. Europe is a huge market for Indian exporters. A slowdown in this area will have a shake out. Even excluding Europe, global demand picture looks soft.
Third, the recent fuel price hikes have complicated the fiscal situation. Indian fuel pricing and tax structure is needlessly complicated. The crude imports are taxed, processing is taxed, there is a sales tax and service charges. Ultimately, the whole oil business contributes substantially to the governments kitty. Any altering of the tax structure is negative for fiscal deficit which is already under stress.
All in all, there is no reason for the markets to behave as they are behaving. While I dipped a week ago at the lower points, I believe there is still down-side risks. We haven't yet completed the correction we were in.
First, it is now a consensus view that inflation will move to double digits soon. What is not understood is real life meaning of this stubbornly high inflation extending beyond two years now. The price acceleration that is implied by continued higher inflation will either impact corporate margins, or impact demand i.e. revenues, or both. To complicate matters further, the investment required for supply-side easing are not coming through. Corporate India is reluctant to work on their long term capacity addition plans. This is clearly not a situation where markets should be heading higher.
Second, there is impending specter of Euro-crisis going out of control. Europe is a huge market for Indian exporters. A slowdown in this area will have a shake out. Even excluding Europe, global demand picture looks soft.
Third, the recent fuel price hikes have complicated the fiscal situation. Indian fuel pricing and tax structure is needlessly complicated. The crude imports are taxed, processing is taxed, there is a sales tax and service charges. Ultimately, the whole oil business contributes substantially to the governments kitty. Any altering of the tax structure is negative for fiscal deficit which is already under stress.
All in all, there is no reason for the markets to behave as they are behaving. While I dipped a week ago at the lower points, I believe there is still down-side risks. We haven't yet completed the correction we were in.
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