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Sunday, December 16, 2007

Look before you leap in the financial markets

An appreciating rupee,higher interest rates,a huge IPO pipeline and firm crude oil prices are weighing over market momentum.Now the question is how will the market pan out in the coming months, given the challenging macro environment?The RBI and the government have been able to moderate inflationary pressures, while fostering an environment conducive to growth. Thus, even with a slight moderation in exports and consumption,the base case for FY08 GDP growth remains at 8.6%, which is reasonable.

But there is evidence of interest rate-induced slowdown in sectors like auto and housing. The evidence from FMCG and retail sectors is mixed.There is a marginal deceleration in consumer non-discretionary spends, but effect of interest rates on consumers' wallet share is unclear.This may be disguised by newer spending formats and fresh waves of consumption.The RBI is set to tame inflation and bring it down to 5% in FY08. Thus, even as there remains a possibility of a rate hike, if the flood of liquidity continues, interest rates seem to be topping out. The RBI's willingness to use the rupee's appreciation to stave off imported inflation will lead to further forex inflows, which will dampen rates and boost consumption.

This will result in a reflation of Indian assets.While the Sensex valuations of over 20x FY09E EPS of Rs 1000 are not so cheap, EPS growth of 17-20% in FY10 sets the base for '10+ acceleration on secular factors. Multiple secular trends make India an oasis in a global welter of fears, even as expectations have outrun short-term prospects.

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