Friday, September 30, 2011

Global Crisis will not Hit India in a BIG way

Dfference between the 2008 crisis and 2011: In 2008, no one was expecting the markets to fall or the crisis to happen. It just happened overnight. So there was an element of shock. This time, were known for several years that Iceland, Ireland, Spain, Portugal, Italy etc are under stress. So, this time the shock value is missing.

What could be done to avert a crisis 
As far as India is concerned, the impact on the economy should be very limited. This is because we do not have any material investments in these geographies. Even the exports to the troubled countries are very small.

What should investors do when there is so much happening in the financial world?
Panic lasts for short periods of time. One way or the other, the Greece issue should be largely over in the next
few weeks or months, and markets will price it in. There will be minimal impact on the Indian economy. Investors should adopt a staggered approach while investing in the current markets. This is so because while there is good value from a medium- to-long term perspective, there is uncertainty in the short term and unlike the economy, the equity markets can get impacted due to sentiment in the short run.

What to do with Indian equities during these times:
Over a one year period, there is very limited downside from current levels in expert opinion. Though it is a difficult time and sentiment is negative, one can expect one year down the line interest rates to be lower. And lower interest rates are supportive and one cam reasonably optimistic, over one two years, markets
should trend higher.

Capital flows: Capital flows can get disrupted, but it will not have a large impact on our economy as our savings rate is pretty high and were able to fund almost 90% of our needs internally. It is possible for one year, till the time capital flows remain disrupted, GDP may grow slower by 1-1.5 percentage points, but it will continue to grow. RBI is well-placed and has a lot of room to maneouvre interest rates are at high levels. The moment you start lowering rates, it will be an effective counter balance.

Inflation: Higher interest rates are leading to a slowdown in interest-sensitive sectors and global commodity prices are also moderating, so inflation should be lower next year.

A global slowdown is actually supportive of a lower fiscal deficit by way of lower oil prices and commodity prices.
If the demand for commodities comes off, prices should soften. Low interest rates globally are driving money into commodities.
Commodities prices are much harder to forecast.

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