Rise and Shine or is it temporary.....

When the deposit rate of banks touches an all time low, it might be a positive signal that there is ample credit available in the economy. However, if the spreads for banks increase drastically on the back on increase in lending rate it’s a sign that the government and banks are wary of another asset bubble and hence discourage any form of lending. One reason can be high inflation, which the government wants to keep in check. Though deregulation of Gas prices is a move in the right direction and was long due in Indian scenario and gas being one of the major vote bank for the government, the deregulation of which might cause some stiff opposition from the left. But more than that it is the consolidation of free flow of credit and regulation of prices that has been a major cause of spiraling Real estate and stock market valuations.
Though the FII’s might give it thumbs up and the government might reduce its public debt owing to reduction in losses of the state owned oil companies (The major Oil co’s increased by 15% each with this announcement), this move might increase the inflation and put further pressure on household expenditure. More than the Petrol it’s the diesel price rise (which still is regulated) which might hurt the inflation figures as this will lead to rise in logistics cost and hence might bite into the bottom-line of companies which will force them to increase the final price of the goods.
Also, it was time since Congress rose to the fact that India cannot be called or shine as an International economy where its hoi polloi are still spoon fed and not let to fend on their own (with reference to heavy subsidies). The Gas prices in the short term will be higher than previous levels which will help the oil co’s in reducing their losses, but more than that it will put India on the map of OPEC who will take into account India’s requirement while determining the price. Its in a stark contrast to the recent past where any price would have to be accepted by the companies as the government was cushioning the consumers through heavy regulation. But are these companies prepared? There should be a move away from the “Babu” culture if they want any kind of profitability in the long run, it won’t be an easy ride for sure.

Now coming back to the Interest rates, though the deposit rates are poor as of now and credit expensive and inflation higher, it can only lead to reduction in the consumption rates. So does this mean that the economy is expected to shrink a little? Is the stock market rising without a base? There is ample money available in the market (read the corporates) and with the FII who are flooded with money after the bail out packages announced in their countries, they have nowhere but India to invest. Reason being that China has been regulating its economy with letting Yuan off the hook (well not wholly, as favorable exchange rates is their cash cow), which is expected to consolidate or correct China's excessive boom. China, hence, in the long run is expected to lose some business to other growth nations while at the same time leading to rise in prices in the developed economies. Also, US markets have risen substantially and investors who are still not confident enough in European markets given the debt conditions, are left with only few asset classes to invest in. Gold, that’s the reason is touching newer highs day after day, Crude on the other hand cannot be trusted upon as week after week the cues from US and UK unemployment and housing markets are keeping ‘it’ leashed. China on the other hand (a major consumer of Crude) is expected to consolidate. The only way out for investors is to keep clinging on to Dollar and Gold. However, we should not rejoice as India is one of the only havens for investment but be cautious, as any positive cue from UK or China or USD correction will lead to withdrawal of funds from the Indian market and diversifying them. This can be seen from the fact that the market still is range bound and is not really willing to touch new highs. Time to time US, UK or China sneezes and India feels the chill, which is what is keeping retail investors at Bay.
Regulation of Gas though is a step in the right direction, when the government has let the economy find its own feet, it still is to be seen if investors give India its long due prominence.