Stock and Rupee – Will somebody tame the bear?

By | June 11, 2012

India is witnessing a fall all around from the stock market to currency value. The only thing that is showing some strength in the market is Inflation.  Even theory of relativity fails when it comes to pulling down the Inflation in India. Crude price has recently shown some weakness as the price of Brent has come down from 124$ to 109$, but the depreciated INR has squared off the benefit of any price easing.  With biting inflation, the purchasing power of investors is also diminishing. The falling stock market seems expensive to the investors now.  This is a bizarre situation for the stock investors as they can’t stay in cash because inflation will eat the idle money, and if they invest it then the risk of loss is very high.

Due to funding problem in Euro zone, both external commercial borrowing by Indian corporate and trade credit fell significantly in last few months. While this deterioration of the capital account shows the global funding problems, it is being driven even more by investor nervousness about the policy threat in India.

Gloomy Global Prospects

The happenings in the global financial world have shaken the Indian stock market. Euro zone crisis is still searching the solution to the Greek problem.  The foreign investors are parking their money in dollars and avoiding position in any other financial instrument to keep the fund safe and intact. This has resulted in a strong dollar against other currencies. The global slowdown has already struck hard on the Indian export companies due to slack international demand. To add to the woes, crude prices have not settled down so much that it could provide some relief from the continuous dollar outgo. The recent industrial production growth of India was minus 3.5% (YoY). It shows the present weakening condition of the economy that is reeling under the problems of inflation, corruption and global economic syndrome and showing no sign of recovery. To make the things worse, India has not shown any step forward to fight back current crisis in anyway. The policy paralysis in Indian economy is hindering reform and making it difficult to solve the issue in an effective way.  Prices of all the imported goods are set to rise with fall in the value of INR against the dollar. Electronic goods, foreign travelling, capital goods, and imported car will cost more with depreciated money. The stocks of companies which largely depend on import of capital goods are at risk of finding new bottom. Furthermore, companies which have huge foreign-currency debt will now need to pay more because of depreciated INR so, pressure on such stocks is quite possible in coming days.

What Equity Investor should do?

The currency problem, global economic weakness and crude crisis are issues, which need some time to get resolved.  The Equity investors who are waiting for stepping into the market to do some bottom fishing should wait for at least European debacle to take some direction. Indian economy is carefully waiting for a good monsoon in coming months. A decent monsoon can prove to be a trend changer and a bad one can bring havoc in the economy. The investors should enter the market with long term purview and use funds smartly. The current scenario suggests that the market still need to find the bottom. Nifty has already seen a low below 4800 levels during day trade. A new low in coming days will further bring negative sentiment in the market. Bears are getting stronger with a series of fall in last few weeks.  In such situation, small investors should stay in liquid while others can use steep fall as an opportunity to pick fundamentally strong shares at a bargained price. The investors should not use its complete fund all at once, but it is better to split the fund in 4-5 parts to buy in every fall.

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