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Happy days are certainly not here again. In fact, the days to come and the days that have gone by were never anticipated by the market men in last three- four years. The rising oil has played the spoilsport, which has resulted in India’s rate of inflation based on whole sale price index (WPI) shooting up into double digit and settling at 11.05% for the week ended June 20th. this has resulted in 30-shares Sensex of the Bombay Stock Exchange (BSE) tumbling down to six month’s low of 14,571 and broader 50-share S&P CNX Nifty of the National Stock Exchange (NSE) settling at 4,347 as on Friday June 20, 2008.

Now the Questions asked is that how long this situation will continue? The Simple answer is for the rest of the financial year 2009 (FY09). The shooting up of the inflation rate will bring in the Reserve Bank of India (RBI) into the picture. To reign in the rate of inflation, the central bank will try to use all the tools available as its disposal including hike in repo rate, hike in the cash reserve ratio and other measures periodically. Already the exercise of painting gloomy picture about the market has begun. Most of the research outfits have begun to come closed to the reality.

HDFC Securities in a note to its clients said, Indian inflation has shot into double digits to a 13-year, as higher fuel prices fed into the date, driving bond yields up and stocks down on expectations of more action from the RBI. Annual wholesale price inflation, India’s most widely watched measure, rose 11.05% in the 12 month to June 7; it’s highest since May 1995. Inflation near double digits is the last thing any Government would like to see in the run-up to the elections. The fact that this came much above the expected 9.82% shocked the street. India joined a growing number of Asian countries no longer able to afford big subsidies in the face of rising prices. China followed suit on Thursday with an 18 percent increase in petrol and diesel prices. This scenario is not unique to India. Eurozone’s inflation is at a 16 year high. Australia’s at a 17 year high and Pakistan’s at a 30 year high. Unlike most countries, India calculates inflation on the wholesale price of a basket of 435 commodities which means actual prices paid by the consumer are much higher.

More monetary tightening is now likely in a bid to calm inflationary expectations. Repo rate and / or CRR hike are some options available to the RBI at or ahead of its next schedule policy review is on July 29. At 1:12 PM on June20, the 10-year benchmark bond yield was at 8.64 %, it’s highest since November 2001 and 17 basis points above Thursday’s close of 8.47 percent.

Rising inflation could:

Lead to an increase in interest rates in the system based on expectation of monetary tightening by the RBI.

Impact demand for a host of industries – prominent being Auto, Consumer Durables, Realty

Make nominal interest rates more attractive/certain for a host of investors as compared to the uncertain equity markets

Lead to uncertainty in valuation of Banking and Financial space

Raise the risk premium demanded by investors in equities

Bring pressure on the Rupee, especially if the FIIs start withdrawing in a big way, This could create a cycle of lower Rupee and lower Stock prices

Lead to a downgrade in earnings in most industries

Lead to panicky pro-people, anti-business action by the Govt, that would not be welcomed by the market participants What can prevent any or all of these from happening?

A sharp fall in oil prices, that stay lower for a few weeks

Cooling down of food inflation in India due to a bountiful monsoon

Global sentiments towards equities and emerging equities stabilising

Calling of an early general elections in India.

Consider the following two letters to the Editor, recently written by the readers of The Hindu. The subject matter of the letter is Market Mayhem, which we have been witnessing in our markets since last couple of months.

The mayhem on the stock exchanges over the past few trading sessions was expected. The inevitalbe has occurred, whether due to the liquidity problem or the proposed circular on capital gains. The markets had grown steadily over a year or two bringing cheet to all. Concomitant to the rise of the Sensex, the bullion prices soared and there was an appreciable weakening of the rupee against the dollar. However, the fall in stock prices is only accompanied by a marginal reduction in bullion prices while the dollar still rules high. The small investor needs to be prudent while investing in stocks.

K.D.Viswanathan from Coimbatore opined that, This refers to the two editorals, aimed at creating awareness among unwary investors about the risks involved in share market and mutual fund investments. The small and medium investors, in general, appear to be a misguided lot. They ignore the basic principle of “BUY”, when the prices dip and “SELL”, when the prices go up.” Market corrections are inevitable but they affect many when they are severe. None can afford to throw caution to the winds.

Mr. Vishwanathan is right, no one can afford to throw caution to the winds and hence the most question that is being faced by the investors in the recent times of turmoil is what to do? Where to invest, when the markets world over are falling and other commodities like Gold and Silver are getting out of their reach and have been equally volatile. It’s not that only Western markets are in doldrums. Their Indian counterparts have also shown similar amount of choppiness, confusing the domestic investors more. Led by the US markets, due to its sub-prime related liquidity crisis, all the markets inculding the emerging markets have taken a severe beating in last three months.

In case of India, the 30-share benchmark Sensex of the Bombay Stock Exchange (BSE) and the broader 50-shares S&P CNX Nifty of the National Stock Exchange (NSE) have remained most volatile in August as well as in September. Both the Sensex and the Nifty saw volatility of 11.26% and 10.66% in the month of August, which almost doubled to 20.21% and 19.96% respectively in September.

The developments in the US markets at the end of the second week-end of september- the fall of Lehman Brothers, Bank of America taking over the embattled Merrill Lynch and the bail out of world’s financial gain American Investment Group (AIG) by the US government (it provided $85 billion) – bought in open the weakness of the US economy.

It’s not all over, two more leading US investment banks, Morgan Stanley and the Goldman Sachs, are also believed to be in line and more bail out by the US government is expected. This means that the crises is far from over and we may see the continuity of the volatility at the stock markets in the days to come. A report released by the Standard & Poor’s (S&P), world’s leading rating agency on how the world’s markets have performed in august is a worth look at. It says, year till date investors world over in the stock markets have lost more than $6.4 trillion (more than six times the Indian GDP.)

The report released in the first week of September says the world’s developed and emerging equity markets both lost ground in August, and have now produced double digit, negative returns over the past three-months. According to Standard & Poor’s monthly stock market review, The World by Numbers, developed equity market review, The World by Numbers, developed equity markets lost 1.56% in August and have fallen 11.55% over the past three months. The world’s emerging equity markets have fared even worse, falling 7.09% in August and 19.40% over the past three months “Global equity markets continued their dramatic decline that began in mid May, decreasing investor networth in August by $0.8 trillion,” says Howard Silverblatt, Senior Index Analyst at Standard & Poor’s and author of the report. “Year-to-date through August, investor net worth has declined by $6.4 trillion.”

Emerging markets posted their fourth monthly loss in a row (six out of eight for 2008) declining 7.09% in August. The three-month toll is now-19.40%, with the 12-month period now posting a -7.27% decline. Only the Philippines (+1.68%) and thailand (+0.90%) managed to produce positive gains in August. Pakistan declined 20.57%) as political unrest continued, while Russia declined 15.23%). Developed equity markets (-1.56%) did not fare much better in August as only the United States (+1.54%) and the Netherlands (+0.85%) produced positive returns during the month.

Six of the ten GICS sectors declined in August as Materials posted a 6.99% return. consumer Discretionary in the U.S rebounded to produce a return of 1.89%, but the ex/U.S. component of the group was off 1.99% for the month. Growth and Value were both down in August, but performance was split by region. Growth’s overall 1.60% decline during the month was the result of a 6.63% drop in the Asian Pacific market and a l.46% gain in the North American region. Value saw similar results, declining 1.50% during the month with Asia Pacific down 4.46% and North America up 0.92%. “U.S. decoupling, which was generally accepted late last year/early this year, has now been reversed with pundits again speaking about size, leadership, and the American economy’s ability to ride out the storm,” concludes Silverblatt. Though the ability of the US and other developed economies cannot be doubted as within a day of crises, all the major central banks including US Fed, Bank of England and the Bank of Japan injected $247 billion to ease the liquidty conditions i their respective economy point of view but if we see it from the India’s point of view, the amount injected is almost equivalent to the total foreign exchange reserve of the country.

The bail out and subsequent injection of liquidity had its desired impact on the bleeding stock markets across the globe including the India, where the Indian finance minister stepped in to dissuade investors fears and declared Indian systems completely insulted from the global crisis and the Indian banking sector is least affected by the global turmoil.. The Sensex and the Nifty posted its one of the biggest intra-day gains on Friday September 19,2008.

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