Monday, August 6, 2007

Dont doubt the Indian Markets

Last few days have been nail biting for investors across the world. From New York to Japan to Mumbai, this volatility has become the talk of the town and whomsoever i interact with, is eager to know the reasons for it.

Now what caused the volatility in the market? The first reason which every fund manager yells is global cues. Most of the Asian markets fell; reversing an earlier rally following a fall in the US market which was down on account of problems with the sub-prime loans. Unfortunately we religiously follow the US market and we do feel that even the Asian markets are overreacting to the US situation.

Another trigger was the sudden change in the flow of FIIs. If we look at the FII inflows in the month of July 2007, it has been positive all the month except the last three days. So FIIs were the buyers for the whole month and they contributed for higher liquidity in the market. They suddenly turned sellers for about three days in the last week.
Many other things also have been happening, Crude touched 78$/bbl, although, its moving back to the 72$ mark now. If you ask me, the rising crude price is actually not a concern, its actually the pace with which such changes take place that matters.

RBI also announced its credit policy on 31st Jul and raised the CRR by 50bps taking it to 7%. One of the fund managers has said that the RBI's tightening bias in its monetary policy to contain inflation will remain until factories increase capacity to meet growing consumer demand. The Banks are going to get hurt the most as a result of CRR hike. But we feel that banks got to be more efficient to maintain their margins. The only option that we feel is the reduction in deposit rates. Most of the banks recently increased the deposit rates and the response was good, as a result
accretion to bank deposits last year was the highest in the last 14 years.
Coming back to the markets, how should investors approach the market in the current situation? In the current uncertain period, investors need to primarily understand what is going on in the market. They should avoid the heard mentality and concentrate on the 'A' group companies which are available at better valuations. Analysts believe that the recent fall has brought the Indian markets to reasonable valuations and this should be taken as an opportunity to buy value picks. There is no reason to panic as we have been continuously claiming that India growth story is here to stay and we should believe in it. There will be some amount of volatility in the market in the short-term, but I believe that if the approach is long-term then there is no reason to panic.


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