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Indian mrkts: Facing the harsh reality
Mon, 17 Jan Pre-Open

Bad times continue for the Indian markets in 2011. After a distressing start in the first week, the second week also saw a sell-off in Indian stocks. The total decline for the BSE-Sensex for this year now stands at 8%. In all, the Sensex has lost 1,650 points during the first ten days of this year. This is around 54% of the gains it had recorded in the whole of 2010!

The factors leading to pressure on Indian stocks is not far to fathom. But there are two that stand out. First is the fear of higher interest rates given that inflation is not showing any signs of cooling off. And now, even the economic growth seems to be stalling. This was made clear by the industrial growth numbers that were released last week. These suggested that India's industrial growth stood at just 2.7% in November 2010, as compared to 10.8% in October.

This is like a catch-22 situation for India's central bank, the RBI. Rising inflation means that the RBI needs to raise interest rates further to control rising prices of everything. But an industrial slowdown means that any rate rise will put brakes on the economic growth.

In the meanwhile, the government maintains its optimism about a strong GDP growth in the current year. They can't be blamed for this optimism as that is what the politicians are paid to do - to remain ever-optimistic and not accept reality, especially when it is harsh.

The fact is that India's industrial growth (and subsequently GDP growth) faces a danger of slowing down even further. This is given that input prices for companies are on a rise, which will either lead to reduced demand, or most possibly cause margin pressure. Weaker margins would lead to reduction in expansion plans of companies, which will impact the country's investment rate. And if this were to come down, the GDP growth will definitely get impacted.

So there are immense concerns that the Indian economy faces as of now. Investors would do well to accept this reality and factor the same into their investment decisions. While the current stock market correction might offer some stocks at cheaper valuations, it will pay to remain cautious on the short term future of stock prices.

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