Concerns on Indian Markets

To get the call on Indian equity markets right, one should get the answers for the following:
1. Where are the interest rates headed?
With one year deposit rates touching 10% and banking borrowing more than 1 lakh crores from RBI, there is a clear sign of tightening. The loan rates have also gone up steeply. My home loan costs 1.25% more in less than two months.
With the windfall gains (due to 3G) missing in the next fiscal and government fixed on increasing spending on NREGA & implementing right to food & education, it would borrow more. This leads to crowding and further hardening of the interest rates.

2. Where is the Current Account Deficit headed?
Thanks to Egypt crisis and QE money chasing commodity prices, India would have to spend more on oil subsidies. This increases the trade deficit.
The CAD may be exacerbated by decreased flow of foreign capital in the form of FII, FDI and repatriations.

3. Is government under control?
Every day sees a new scam. CWG, 2G spectrum, Adarsh, Black money and the lost goes on. All these new items do not give confidence that the government is under control. Where has the promise of 20 km road per day gone? When will railways start to improve its security, infrastructure, sanitation and catering? When will food inflation come down? When will reforms process restart?

4. Is the growth under trouble?
The corporate earnings season for the third quarter has seen no upgrades from analysts. The initial trend shows that the margins are under pressure due to increase in raw material prices. The 20% Sensex EPS growth for FY12 could be tempered downwards by atleast 5%. With FY11 EPS at 1050 and FY12 EPS at 1200, we could see the fair value for Sensex at 18,000. As we know, market over react on either side and can expect the same now.

I am not too worried about the decreasing government consumption figures. It would come back if other sources dry up. However, I am getting concerned about lower numbers for the Index for Industrial Production. The IIP number has come at 2.7% for Nov’10 and the expectation for Dec’10 is 0.6%

What is heartening is that the CSO has pegged FY11 Agriculture growth at 5.6%. This takes the GDP growth to 8.6%. As FY10 growth has been revised upwards, we are growing slower than envisaged.

5. When will inflation subside?
WPI for Dec spiked up to 8.43% from7.48% of the previous month. The food inflation in higher double digits still persists. There seems to be no silver lining in the nearby horizon

6. Who wants to buy?
- FIIs do not want to buy Indian equities because the developed world is looking attractive
- FDI is slowing down because of lack of reforms and our dear environment minister putting road blocks
- Mutual Funds have no additional inflows to buy. Funds into ELSS are trickling in
- Insurance companies’ business has slowed and hence the incremental money has gone down
- Corporates are not buying as liquidity is king and they do not want to lock in as March is round the corner
- HNIs will not buy until the confidence is back
- Retail will not buy until the market bounces