Have All The Negatives Been Priced In?

The RBI’s stand over the issue of inflation is well-known and has been experienced by the markets. If the RBI continues to remain stringent in its monetary policy, the possibility of the markets going down further cannot be denied.

Besides inflation, the recent numbers of industrial output tell a story in itself. With growth slipping to a level as low as 0.1 per cent, it is quite unlikely that the country will attain a growth rate of 7 per cent this year. Besides, this is also an unusual situation in which the growth rate is below the potential and inflation is above the normal level. 

Meanwhile, imports have become costly as the dollar is at its historic highest levels. Commodities such as coal, crude oil and gold have become expensive due to the tumbling rupee. Even though crude oil prices have slipped below the USD 100 per barrel mark, there is no guarantee that they will remain the same.

Further, the depth of the euro zone crisis is unimaginable. Even experts are unaware of where Europe is heading toward. The euro zone debt crisis has brought the equity markets down to single digits in the Indian markets. The future of Euro also remains unknown. As of now, there is upwardly directed risk of the political crisis unfolding in Greece. The slowdown in these countries has affected some specific sectors in India, as for example, textiles. With the governments in the European region adopting cost cutting measures, the growth of India and other countries will be hampered. 

We believe that these risks have not been fully priced into the market, which is evident from the fact that any adverse news coming from Europe still pulls down the global indices. On the home turf, there is the looming risk of a political crisis. The nation will go to the polls in two years and the current government has failed in implementing any major reforms. The political risk and the government’s policy paralysis seem partially priced into the markets but anything negative still has the potential to aggravate the returns.

The global credit rating agencies are warning the government to downgrade from investment grade to the rank of speculative gains. If such a thing happens the bond yields will go up. The FIIs will also start selling their holdings and this will apply negative pressure on the rupee. Under these circumstances we see a further downside risk to the markets. Hence, investors need to adopt a very cautious approach while investing in equities.