Everyone is preparing to say good bye to 2013
What an year from economy and stock market perspective!! Rupee crashed to records low during the year, but recovered. Economy growth recorded sub-5% levels, unimaginable couple of years ago. However, stock market - Nifty touched near record highs; although general market stocks continue to be sluggish. Inflation continues to be higher despite hike in interest rates.
I remember getting a presentation at the beginning of the year from a mutual fund who painted a very rosy picture for 2013. It stated that the banks will have a nice time because the interest rates had reached a peak in 2012. Because of the reversal of interest rate cycle in 2013, the economy growth would recover in India and this would lead to new stock market highs. It also predicted that Indian Rupee will strengthen to Rs 50/- due to the robustness in the economy.
How different or mixed was performance actually we witnessed. The interest rates were hiked as the 'black swan' of current account deficit hit the economy hard. Subbarao tried several tricks; however did n't had much impact.
Luckily, the change in guard in the RBI brought in some fresh and innovative thoughts and the actions taken by Raghu Ram has worked and controlled the devaluation of Indian Rupee.
One of the policies, Raghu Ram is also following is that of 'elevated' interest rates, which really hurts the economy. What is the reason for higher interest rates? Well it is a text book solution for several economic ills. One reason is inflation and the other (to a lesser extent) is the currency related reasons.
Financial thoughts still believe, inflation cannot be controlled by interest rate hike alone.
As we have mentioned in the previous posts in this blog, hiking of interest rates since 2010 achieved only lower and lower economic growth; inflation stubbornly holds its ugly head high. So, the interest rate hike is not a panacea for inflation - or it must be treated with other medicines as well. Well there is one medicine that can work - increase the supply side to ensure that too many cash is not chasing a few goods and services. But this is something the government policies must take care of. However, government is delaying its projects while private sector is not encouraged to take risks when even the reputed personalities like Kumar Aditya Birla is chargesheeted. Many construction contractors and villa project developers are also raided by Income-tax. India is a place of lot of opportunities; but be prepared !
So, part of the solution to the inflation also lies in good governance. Indians will get a chance to reduce the inflation by changing the current government and ushering in a more dynamic and proactive government. It looks like Modi can deliver - although his election may make the minorities uncomfortable; nonetheless this is a risk that can be taken in view of the overall good of the country. Moreover, coming from the place of Gandhiji, he ought to show tolerance.
Then there is imported inflation - higher the devaluation, higher the inflation as 80% of the oil & gas requirements are imported. Hence, currency stability is a MUST. But the tapering threat is real and tapering has to happen. The good news is that Raghu Ram is preparing India for this big event. The defences are almost ready. CAD has reduced to about 3% now (from 6% during April 2013) and he has some more tools for fighting it out should the currency comes under attack.
So what would be the 2014 prospects be? Well of course, mutual funds and other stock market pundits will definitely come out with predictions that will look rosy due to several reasons. Financial thoughts will share the views shortly.
