The pain will last much longer

It has been a roller-coaster ride so far and the trend for the rest of the year suggests the same. The first quarter of this calendar year saw a 24 per cent dream run in the benchmark indices on expectations of the interest rate cycle peaking out, policy action by the government and attractive valuations. The argument was that ‘most of the negatives have been discounted’ and, thus, we could see the markets rallying sharply on any hint of optimism. Foreign institutional investors (FIIs) seemed to be the smart ones pouring in nearly $5 billion.

However, the pendulum swung back with a host of new problems and we are now again staring at the December 2011 lows. Top of the list is depreciation in the rupee. FIIs faced a double whammy and the stabilisation of the rupee seems now a pre-condition for any foreign flows to resume. Given the situation of sticky inflation, lack of reforms facilitating foreign direct investment and portfolio investments, it is unlikely the rupee will appreciate significantly. The establishment, too, seems to be taking shelter behind the euro zone issue, blaming it for the currency depreciation and our woes. Somewhere, they are resigned to the rupee at best stabilising at 53/54.

At the beginning of the year, there was talk of at least a 125-175 basis points cut in repo rates. After a 50-basis points cut, the Reserve Bank of India (RBI) governor highlighted concerns about inflation and suggested further decline seemed unlikely in the immediate future unless inflation was reined in, which now seems remote, with the currency depreciation.

The gross domestic product (GDP) numbers for the March quarter, at 5.3 per cent, stood at a nine-year low. All eyes are now on the monetary policy review expected on June 18 but once again the RBI has to do a tightrope walk. With policy paralysis not likely to ease soon, India may have to settle for sub-par growth and elevated inflation for some more time. We are in a vicious cycle of currency depreciation — high fiscal deficit — high interest rates — lower growth — lower foreign inflows. Unless concrete policy action improves the sentiment, it would be difficult to break this cycle. The only redeeming feature in the past few weeks was the significant correction in oil prices.

Internationally, the noise of Greece exiting the euro zone is getting louder, and there are fears of the contagion spreading to other peripheral economies.

India has lost a golden opportunity in the past two years. A strong currency heading towards sub-40 levels, renewed international interest, a GDP forecast of close to nine per cent and relative advantage compared to our peers. Most of this turned turtle due to lack of policy action, a barrage of scams and certain retrograde steps. Someone aptly said we had snatched defeat from the jaws of victory.

In the short term, the Nifty is unlikely to cross 5,000/5,100, given the considerable headwinds we faced. Although the valuations are extremely attractive at sub-11 times earnings, the rupee depreciating further could make this argument senseless.

Needless to say, once issues such as high fiscal and current account deficits, a depreciating rupee, GAAR and the euro zone settle, we could see Indian markets back in the growth trajectory. But, this is easier said than done. And, we don’t know how long it would take. We could well be in for a sharper dip below 4,500 (Nifty) before any serious buying sets in.

To conclude, my heart is still optimistic but my head argues this pain will last much longer.

The author is chief operating officer of Way2Wealth Securities Pvt Ltd