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Changing faces of Indian Economy

March 16, 2009

Last week, Indian economy did a sudden volte face with posting of newer numbers, which did well to provide the observers with a ray of hope. Industrial credit numbers soared and for the first time since the downturn started, non food industry credit has soared to 28.843k crores from 13.56k crores, the highest increase in the past 5 months.

Cement data has again spurred and auto data has shown a quiet resilience in this economy. Tata Steel has once again shown a 47% jump in net sales in February.What essentially we are seeing is the strength of rural sector in pulling up the economy. Very ironically, I am reminded of one quote from Kishore Biyani who when asked about the consumer sentiments had this to say,

…we find the consumers who had been consistently exposed to media, are more nervous, than those who haven’t…

This was quite some time back, and the latest numbers if construed as the strength of rural India has worked well.

A lot of speculation is still in place though, and very ironically not many people have an idea about it

Part of the loan surge in India will be on account of pre-election spending. Part of it will reflect year-end expenditure of government departments. And analysts say that part of the reason is that firms are resuming production after running down their inventories in earlier months. Or it may just be that the economy is finally recovering from the severe credit crunch of the last quarter.

-Manas Chakravarty, Livemint,“The economy just…”

But I have a slightly different take on the issue. I suspect falling inflation has a hand larger than what appears at the first glance.

Shifting the focus to Indian markets, might help in having a more objective look at gauging a possible shift of sentiments. NSE’s flagship index, NIFTY closed at 2720 with a 4% rise and highest in the recent past. The ferocity of the pullback took a lot of the participants by surprise. But very objectively, charts have something else to talk about:

nifty

A lot of lost ground has to be regained if a bottom has to take a shape

Currently, NIFTY is trading at 2720, where as the Long Term EMA, around 180 days average points to a minimum 3300, before a bottom is in shape. The system though is increasingly at a juncture where retail capitulation has still not occurred.

What is retail capitulation?

Bottoms tend to be highly painful periods and is seldom quick. Markets tend to ‘sleep’ and the increasingly low activity in the system tend to drive the retail investors in rolling out their entire stake and selling it out. Often, this capitulation in fact, drives the market higher as smart money picks up on retails follies and takes up the picks at even lower cost.

So definitely, we are yet to see, a huge prolonged period of low volatility, down to earth indices and an inverse plateau as and when can be compared with usual bottoms after a bubble.

So how soon, the markets bottom out depends on how soon, the indices tank. Will the indices tank after testing 3300 levels? Or will it tank before it even tests that ‘mythical’ level and gives rise to market capitulation.

My take is while micro data might continue to help a bit, nudging it here and there, but the macro data and the economy in general will continue to disappoint. Market bottom might need some time to come and with that economy will take more blood with it in its hands.

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One Comment leave one →
  1. March 17, 2009 5:06 pm

    hey soham.. great stuff like always :D..
    love the new blog theme.. !!
    keep up the good work 🙂

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