Globally, expectations of a sustained economic recovery are giving way to talk of a double-dip recession. This negative view is compounded due to the fact that the European Central Bank has proposed to postpone the exit from emergency lending measures to 2011, indicating that problems still persist in Europe. The emotional quotient of the market is one of disappointment, and that does lead to sensational headlines on the bearish side.
RBI's view
However, the Reserve Bank of India (RBI) seems to be undeterred by such negative news. Like the stock markets, the view of the central bank was benign as expressed in the annual report released last week The RBI is very optimistic about India's GDP growth being very resilient as has been demonstrated on various occasions like the global downturn of 2008-209 or the domestic agricultural shortfall of late 2009. They go on to say that even now the prospects for the financial year 2011 are extremely bright based on the corporate and consumer durables' sales numbers, and that private consumption demand has grown so much that it almost makes growth self-sustaining. The RBI just wants a good monsoon and better fiscal control for its prediction to come true.
Risks
What the RBI is really bothered about is inflation. Inflation here is a long-term problem. There are many challenges it faces in meeting the inflation targets, as the inflation problem is in the supply side. Hence, the monetary policy has a smaller role to play, while the bigger role falls on the government to mitigate supply constraints.
For supply side constraints to be solved, structural issues need to be addressed. For instance, food production has to be bolstered. Investments in food supply chains have to be made. More importantly, food wastage has to be significantly reduced.
It is reported that India loses $21 billion worth of farm produce after harvest every year because of wastage. Moreover, it has a storage capacity shortfall of 35 million tonnes. Addressing these issues could go a long way in bringing down inflation to lower and stable levels. Apart from inflation, the RBI perceives volatile capital flows as a meaningful risk to the economy.
Investment strategy
Given the two diametrically opposite views - one global and another local -investors are now faced with a dilemma. Should you stay invested in stocks or move your investments to safer avenues such as fixed deposits? There does not seem to be any reason to panic yet. A single Hindenburg Omen signal may be a warning that something is not quite right, but the signal has to be supported by other factors before one can act.
The US stock markets are in a correction mode already and have pretty much been in a correction mode throughout this year. It does not immediately indicate that emerging markets like India have to follow suit. This can be validated from the IMF roadmap alone, which says developing Asia will grow at 8.7 per cent next year as against 3.4 per cent for the advanced world. There is a good intrinsic growth in the Asian region, which will be reflected in the indices sooner or later.
Reff: Economic Times.
