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Happy days are certainly not here again. In fact, for the past three or four years, the market people have never foreseen the days to come and the days gone by. Rising oil has played the spoilsport, causing India’s inflation rate based on the wholesale price index (WPI) to shoot into double digits, settling at 11.05% for the week ended June 20th. this caused the Bombay Stock Exchange’s (BSE) 30-track Sensex to fall to a six-month low of 14,571 and the National Stock Exchange’s (NSE) broader 50-track S&P CNX Nifty to drop on Friday, June 20, 2008 leveled off at 4,347 .

Now the question is how long will this situation last? The simple answer applies to the remainder of fiscal year 2009 (FY09). The inflation rate spike will bring the Reserve Bank of India (RBI) into play. To contain the rate of inflation, the central bank will try to use all the tools at its disposal, including raising the repo rate, raising the cash reserve ratio, and other regular measures. The exercise of painting a bleak picture of the market has already begun. Most research institutions have started to get closer to reality.

HDFC Securities said in a note to its clients that Indian inflation has rocketed into double digits for 13 years as higher fuel prices factored into the date, bond yields higher and shares lower on anticipation of more RBI action. Annual wholesale price inflation, India’s most closely watched measure, rose 11.05% in the 12 months ended June 7; it is the highest since May 1995. Near double-digit inflation is the last thing a government would want ahead of the elections. The fact that this was well above the expected 9.82% shocked the street. India joined a growing number of Asian countries that can no longer afford large subsidies in the face of rising prices. China followed on Thursday, with gasoline and diesel prices rising 18 percent. This scenario is not unique to India. Eurozone inflation is at a 16-year high. Australia is at a 17-year high and Pakistan is at a 30-year high. Unlike most countries, India calculates inflation using the wholesale price of a basket of 435 goods, meaning the actual prices paid by the consumer are much higher.

Further tightening of monetary policy is now likely to help calm inflation expectations. Repo rate and/or CRR increase are some options available to RBI at or before its next scheduled policy review on July 29th. At 1:12 pm on June 20, the benchmark 10-year bond yield was 8.64%, the highest since November 2001 and 17 basis points above Thursday’s close of 8.47%.

Rising inflation could:

Lead to a rise in interest rates in the system based on anticipation of monetary tightening by the RBI.

Influence demand for a wide variety of industries, most notably auto, consumer durables, and real estate

Make nominal interest rates more attractive/safe for a variety of investors compared to uncertain stock markets

Leads to uncertainty in the valuation of the banking and finance sector

Increase the risk premium demanded by equity investors

Put pressure on the rupee, especially when the FIIs start to pull back in a big way. This could start a cycle of lower rupee and lower share prices

Lead to a downgrade in earnings in most industries

Leads to panicked pro-popular, anti-business government measures unwelcomed by market participants. What can prevent some or all of this?

A sharp drop in oil prices that remain lower for a few weeks

Cooling of food inflation in India due to abundant monsoon

Global sentiment towards equities and emerging market equities is stabilizing

Call for early general elections in India.

Consider the following two letters to the editor recently written by readers of The Hindu. The subject of the letter is the market chaos that we have observed in our markets over the last few months.

The chaos on the stock exchanges over the past few trading sessions was to be expected. The inevitable has happened, whether due to the liquidity problem or the proposed capital gains circular. The markets had been growing steadily for a year or two, bringing good things to everyone. Simultaneously with the rise in the Sensex, precious metals prices rose and there was a noticeable weakening of the rupee against the dollar. However, the decline in stock prices is only accompanied by a minor drop in bullion prices while the dollar still reigns high. The retail investor needs to be careful when investing in stocks.

KDViswanathan from Coimbatore said: This refers to the two editorials aimed at raising awareness among unwary investors of the risks associated with stock market and mutual fund investing. The small and medium-sized investors seem to be a misguided bunch in general. They ignore the rationale of “BUY” when prices go down and “SELL” when prices go up.” Market corrections are inevitable, but they hit many when they are severe. No one can afford to jettison caution.

Mr Vishwanathan is right, no one can afford to ignore caution and as such the most common question facing investors in the recent period of turmoil is what to do? Where to invest when markets around the world are falling and other commodities like gold and silver are out of reach and just as volatile. It’s not that only Western markets are in the doldrums. Their Indian counterparts have also shown a similar level of unrest, further confusing domestic investors. Led by US markets, all markets, including emerging markets, have taken a major hit over the past three months due to their subprime liquidity crisis.

In the case of India, the Bombay Stock Exchange’s (BSE) 30-stock benchmark Sensex and the National Stock Exchange’s (NSE) broader 50-stock S&P CNX Nifty remained the most volatile in both August and September. Both the Sensex and Nifty saw volatility of 11.26% and 10.66%, respectively, in August, which nearly doubled to 20.21% and 19.96%, respectively, in September.

Developments in US markets at the end of the second weekend of September – the fall of Lehman Brothers, the takeover of ailing Merrill Lynch by Bank of America and the US government’s bailout of American Investment Group (AIG) from world financial aid (she noted $85 billion ready) – openly bought into weakness in the US economy.

It’s not all over yet, two other top US investment banks, Morgan Stanley and Goldman Sachs, are believed to be on the line as well and more US government bailouts are expected. This means that the crisis is far from over and we may see continued volatility in stock markets in the coming days. A report released by Standard & Poor’s (S&P), the world’s leading credit rating agency, on how world markets fared in August is worth checking out. It says investors worldwide have lost more than $6.4 trillion in stock markets to date (more than six times India’s GDP).

The report, released in the first week of September, says global developed and emerging equity markets lost ground in August and have now posted negative double-digit returns over the last three months. According to Standard & Poor’s monthly stock market report, The World by Numbers, developed market stock markets fell 1.56% in August and are down 11.55% over the past three months. Global emerging equity markets have performed even worse, falling 7.09% in August and 19.40% over the past three months , Senior Index Analyst at Standard & Poor’s and author of the report. “Since August, investor net worth has fallen by $6.4 trillion.”

Emerging markets posted their fourth consecutive monthly loss (six out of eight for 2008) and fell 7.09% in August. The three-month toll is now -19.40%, while the 12-month period now shows a decrease of -7.27%. Only the Philippines (+1.68%) and Thailand (+0.90%) were able to post positive gains in August. Pakistan slipped 20.57% as political unrest continued, while Russia slipped 15.23%. Developed equity markets (-1.56%) did not fare much better in August, with only the United States (+1.54%) and the Netherlands (+0.85%) posting positive returns over the month.

Six of the ten GICS sectors fell in August as commodities returned 6.99%. US consumer discretionary rallied to return 1.89% but the ex/US component of the group lost 1.99% for the month. Both growth and value were down in August, but performance was split by region. Growth’s overall 1.60% decline for the month was the result of a 6.63% decline in the Asia-Pacific market and a 1.46% gain in the North American region. Value posted similar results, falling 1.50% over the month, while Asia-Pacific fell 4.46% and North America gained 0.92%. “US decoupling, which was widely accepted late last year/early this year, has now been reversed, with pundits once again talking about the size, leadership and ability of the American economy to weather the storm,” concludes Silverblatt. Although the ability of the US and other developed economies cannot be doubted as within a day of crises all major central banks including the US Federal Reserve, Bank of England and Bank of Japan injected US$247 billion to From the Indian perspective, the amount injected is almost equal to the country’s entire foreign exchange reserve.

The bailout and subsequent liquidity injection had the desired effect on bleeding stock markets around the world, including India, where the Indian finance minister stepped in to allay investor fears, declaring Indian systems were completely shattered by the global crisis and Indian banking sector is the least affected by the global turmoil. The Sensex and Nifty posted one of the biggest gains of the day on Friday, September 19, 2008.