Changing Oil and Commodity prices

The Sensex slipped under the 10,000-mark and the reaction of people was that it may be “Last chance”. Investors are pressing the panic button and getting ready to bail out. There is talk of a further fall being splashed over all the television channels. Even analysts are painting a gloomy picture and advising investors to wait on the sidelines.

In fact, a fund manger of one of the largest domestic mutual funds was advising a cautious approach. So, is it really the last chance to buy?

We consider they are talking to a different set of people. The target audience for TV channels (and the advertisers) is the active trader lot which contributes to the Rs 60,000 crore volume on the stock exchanges everyday. The entire effort is focused on finding out where the markets are likely to go the next day.

This dilutes their focus from the underlying fundamentals and what all the experts and TV channels are trying to do is pick the bottom. Everyone is trying to time the market. Not a bad idea.

The experts told us recently that timing the market was a futile exercise. Long term investing in equity is the best vehicle and option. What has changed so drastically that the long term prospects are spoiled?

The long term prospects were never as good as the analysts were painting it out to be at 20,000 levels. But now things are not as bad as many are projecting it to be. The problem with most analysts and a large section of the media is the tendency to take the recent trend and project it into the future.

Markets rallied from 15,000 to 21,000. India is doing well. We will rally till 25,000! We also saw this effect in the mid-year with oil. It rallied from $70 to $140. There is no oil available and it will touch $200 soon.

We are seeing the same logic in reverse today. Markets have crashed. India is facing difficult times. So, we will continue to slide further. Unfortunately, this is the level of intellectual analysis being displayed by most analysts and commentators.

But is India set for a rough ride? There will be many corporates who will reel under the liquidity crunch being faced now. The days of really easy credit are over and many corporates, who had embarked in excessive and aggressive expansions and acquisitions, will be squeezed by the credit crunch.

Political considerations (like the fear of inflation in an election year) have put economic growth priorities on the back burner: India Inc is paying the price for this and the current pessimism about the negative impact is justified.

But this analysis misses a key point. Most of India’s troubles are domestic in nature, caused largely by the Reserve Bank of India’s (RBI) tightened cycle. This gives us the ability to resolve our issues domestically when RBI reverses the lightening cycle. With the recent Cash Reserve Ratio (CRR) cuts and the expected rate cuts in the credit policy, RBI has already begun the loosening cycle.

Inflation has dropped below 12% and should drop below 10% in the next two months. Commodity prices have dropped sharply across the world providing relief from the inflation threat. The long term rates are already indicated lower by the debt market in India. The government securities are quoting at a 10-year yield of 7.68% as against a peak of 9.45% just three months back, a drop of more than 170 bps.

Thus, India’s growth should be back on track over the next six months. The sharp fall in oil and commodity prices will reduce the current account deficit being run by India. The fiscal deficit will also be sharply lower than feared as the oil and fertilizer subsidies will come in closer to the budgeted numbers.