Deepak Lalwani's India Report
Comment of the Day

November 15 2011

Commentary by David Fuller

Deepak Lalwani's India Report

My thanks to the author of this informative report. Here is a brief sample:
India's wholesale prices remained above 9% in October for the 11th month, and rose above expectations to 9.73% vs 9.72% in September. Worryingly, the rate is not falling as hoped for by authorities. Local energy and food prices rose, despite a sharp fall in global commodity prices. Price pressures are thratening to push India's inflation, the highest in Asia and among BRIC economies, to double digits last seen 16 months ago. Food price inflation in October accelerated to 11.06% from 9.23% in September. Rising rural wages and supply and transport bottlenecks have contributed to food price rises. Prices of vegetables and pulses and those of high protein items like milk, eggs, fish and meat have risen, reflecting changes in dietary patterns due to higher disposable incomes. Core inflation, which excludes food and fuel prices, is still high and indicates persistent price pressures in the economy.

The RBI has indicated last month that interest rates may be put on hold at the December meeting, after 13 rises in 2010 and 2011. The Indian Central Bank has been the most aggressive in Asia this year. Elsewhere in Asia and Latin America some Central Banks are adopting a more accomodative stance on interest rate hikes in the face of increasing fears of a global recession. This is despite inflation not falling as hoped. Indonesia and Australia have cut interest rates recently, while other banks have toned down their rhetoric on inflation and interest rate rises.

David Fuller's view India's high interest rates in response to persistent inflation remain a headwind for the stock market. The question is: how much of this is already in the price?

Most of it, I suspect but there is a perception among international investors that India's government has lost its way, not least regarding corruption. This is not an unreasonable conclusion on either an absolute or relative basis.

Consequently there are still risks to the downside for India's stock market. That would present an additional buying opportunity, in my opinion. As a large and promising growth economy, India's market should bounce back strongly when sentiment improves, probably with the help of better data on inflation and a correspondingly more accommodative monetary policy.

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