Saare Jahan se Acha - Hindustan Hamara

A line written so many decades ago still proves vital and true.
In continuance of my article written on May 24th 2010, where I supported the Indian Rupee and correction of USD, there is speculation that India might outshine the other economies with help from EU’s deteriorated position. The interest rates worldwide are being kept artificially lower by the government, even though the inflation is rising, majorly due to mindless bail out packages from governments worldwide so as to honor the banks commitments and stopping from the collapse in the ‘confidence’, as happened in 2008. This low interest rate environment is kept for companies to borrow and cover their losses (if any) by investing in ‘safe’ and ‘growth markets’ ventures worldwide. The private sector as explained in my other articles (Read my Blog on Is Inflation good for the government and private sector) stand to benefit not only because the value of their previous loans is eroded due to falling value of money and on the other hand they are getting cheaper credit to invest in growth markets.
However, this window of opportunity is short lived and will make the rich richer, whereas its far from any equilibrium state of the economy.
Coming back to the India story, the markets are set to rally, though not without some hiccups. The biggest reason being International news and sentiments. The FII’s will withdraw on two counts: Firstly, on any negative news to safeguard their money, e.g. US oil spill, EU crisis, Japan political instability, etc. Secondly, at every new level breached, i.e. profit booking in anticipation of negative cues or demonstrating a cautious approach.
India is the blue eyed child of most international investors and sovereign funds, given India’s safe policies and stringent financial structure. Though, this has been ingrained in us and most countries find it difficult to follow our policies and structure, it’s the very innate conservative nature that has been a cause for out sustained survival for a long time.
However, this is a major cause of volatility in the Indian markets and the investor especially the retail investors should be vary as the sharp volatilities might lead to some capital erosion, hence, staggered investment strategy should be adopted.

Euro on the other hand is breathing heavily even as the bail out package have been adopted as Germany which is a major supporter is facing a stiff resistance at home for the same reason that Taxpayers are unhappy to support a defaulting nation of their hard earned money. However, the banks in the EU have become astonishingly attractive due to 12% slide in the markets. This might be a time when investors might gun for some ‘buying’. However, this will again be volatile in the next 4-6 months, but will give a lot of respite to the struggling Euro and Sterling. Currently trading at $1.23 (±5%), once the investors find a stable international platform will start investing the banks. This will stabilize the Euro - Dollar imbalances; however, the confidence of strong monetary policies should be instilled amongst the investors.
China on the other hand, is set to revalue or reform its monetary condition in the next 22 months. China’s monetary policy and weak system is out in the open and its artificial currency exchange rate which was hampering the World economics is being pressurized to be revalued by the powerhouse (the US). Not that the vested interest of US in it. Revaluing the loans would cause a slight reduction in its public debt (a whopping $895bn. borrowed from China alone).

However, all of this is just favoring India more and more each passing day. China is doing what France did post World War I, that is to hoard loads of Gold (then the system of financial currency worked on Gold Standard) by keeping the currency artificially lower, as with the interest rates. However, one should always remember, that there is a thin line between Power of Creditor and Debtor. Beyond a certain limit the authority shifts towards the Debtor as the risk involved in defaulting poses a big threat to the Creditor and restructuring in today’s scenario is not a viable option.
Hence, India is a safe bet for all investors, as money kept in banks is a depreciable asset, owing to high inflation in world economy, unless the economy is being deflated as with some of the PIIGS.
The Rupee dollar exchange rate as of today stands at 46.72 to a dollar (± 5%). This according to my previous articles is again short term and will correct in coming months (2-3 months at the max). The stability of Rupee will come from foreign inflows due to India being a safe haven with respectable returns, this coupled with slight respite in the EU region and China being overvalued. EU’s improvement will only strengthen the sentiments and will lead to some stability in the international scenario, again leading to further inflows in India and retention of funds.
Crude on the other hand has stabilized on the news of fall in US stockpiles. However, I still fail to be bullish on crude unless situation in EU stabilizes; the housing market has collapsed so as the demand from China (which is expected to deteriorate in the near future). The demand largely in the US is based on the interest rate environment and the housing market, as in China its based on the exports and the industrial development.

I am bullish on India growth story, though some stocks still remain overvalued the mid cap boom is to set off again. However, a lot depends on how EU and structure their financial policies.