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The Indian equity markets are nervous at present owing to negative global cues. We are going through another bout of risk-off in global markets, this time triggered by worries of a disorderly exit of quantitative easing (QE) by the US Fed. But in my view, the Fed is anything but in a tight spot - in fact, it appears well in control with its QE programme, yielding all the desired positives, such as an improving growth outlook and declining unemployment for the US economy, without triggering any of the negative repercussions such as flaring commodity prices - in fact, commodity prices are heading lower. So, the Fed has no reason to disruptively undo all its good work of recent years, and will gradually taper its QE programme in an orderly fashion. So, this bout of risk-off is also likely to pass in the coming weeks and months as the markets again focus on big positives, such as reviving the US economic growth, that can have a permeating positive impact on the global economy.
Meanwhile, in India, our currency's woes have been exacerbated by near-irrational appetite for gold imports due to which the trade deficit for May widened to $20.1 billion. With the 17 per cent correction in gold prices since the beginning of the year, there has been a rush to buy and volumes for gold import more than doubled in April and May (accounting for almost 30 per cent of last year's entire buying). In spite of this excessive buying by India, the world's largest gold importer, in dollar terms gold prices have been coming down. In my view, India's demand is likely to come down drastically in the coming weeks (already coming down in June, according to government reports). This is likely to trigger further correction in gold prices and eventually rectify the current rush. The moderation in demand is likely to be a huge positive for mobilisation of financial savings in the economy. The share of financial savings to total household savings in the economy has fallen to about 36 per cent in FY2012 from 52 per cent in FY2008. I believe, moderation in gold demand and a shift in the preference towards saving in financial assets would aid in bringing down interest rates and hence boost investment in the economy.
The biggest positive in our economy perhaps comes from the substantial moderation in WPI inflation, to within the Reserve Bank of India's (RBI) comfort level. Food inflation too, is likely to moderate. I believe, the onset of a normal monsoon, decent rabi production in FY2013 and expectations of moderate minimum support price hikes bode positively to support the moderation in food inflation. These factors are likely to give RBI room to cut the repo by an additional 50 basis points to support economic growth.
In summary, there are a number of positive factors developing in the last few months that have not got a chance to reflect in the markets, due to the ongoing risk-off sentiment. It provides a great time to buy equities at cheap prices, as the wait for healthy returns is not likely to be much longer from here on, as the market starts recognising these meaningful positive lead indicators.
The author is chairman and managing director, Angel Broking
