Inching Out Of Trouble

[INSERT_1]

The global economy is in a tough spot, caught between the sharply slowing demand in many advanced economies like Japan, Germany, USA and the rising inflation everywhere, notably in emerging and developing economies, including India. But comparatively speaking, the Indian economy, which is a domestic-led economy contributing 68 per cent of GDP, will not be impacted to a great extent, and whatever  impact we will have can be minimised if we become a little more proactive and take corrective steps.

It may take a while before the Western countries come out of the current recession. The only difference this time compared to the other recessions is that all the governments are willing to correct the situation. They are lending a helping hand to the banks and financial institutions to get out of the current crisis by allocating large sums of money for improving the situation. Global growth is expected to pick up gradually over 2009-2010.

Even with the G-20 setup it seems quite hazy a picture for these countries  as there doesn't seem to be anything attractive and supporting coming out of the meeting in spite of creating a huge hype about it. It hasn't been able to provide an edge for the respective countries. However, it will benefit a country like India as our country is getting greater importance unlike in the earlier times. Hence, the two countries that will significantly improve and get the required weightage are China and India.

Today, one of the reasons why our economy is suffering is because of inflation. The situation went out of control and as elections are inching closer the government got into a panic situation leading them to tighten the money market by increasing the interest rates. Now with the deceleration in oil prices and with commodity prices scrashing globally, the RBI should take courage and reduce the interest rate and not just by 100 or 200 bps. India needs its liquidity as this is not likely to come from outside at least in the near term. RBI is definitely taking the necessary steps for improving the situation but it's just that it needs to take decisions faster and be more proactive to make the situation improve faster.

Look at some of the leading companies in the country like Tata Motors and Ashok Leyland which have announced production cuts. They have clearly said that the commercial vehicles are sold on credit only which shows a crystal clear picture of the situation. Now that the inflation has come down to reasonable levels the government should not waste time in taking the necessary steps. The ball is in the court of the government as it can reduce the interest rates and energy prices to ease the situation. The commodity prices on the other hand will remain low in times to come, the volatility of these prices in the near past can to be attributed to the hedge funds. These funds should be regulated or banned completely in the larger interest of the world economy, as they tamper with commodity prices just for making a quick buck.[PAGE BREAK]

One needs to understand that currently the markets are not working only on the earnings, but they are also moving on the financial availability of cash in the system. We need to understand how to reverse such a situation so that in times of cri-sis our markets don't get impacted drastically.

No one can take a call on where the markets will be one year down the line as certain factors need to be tackled and there needs to be some clarity on the government's decision. Given the fact that after such a long time in the Indian capital market when blue chips are available at a very reasonable price, with a long-term view of two years at least, it is advisable to remain invested and not get out of the markets now.