The Hindu Business Line : Market View

The headline inflation as represented by wholesale price index moved well above the 6 per cent level – 6.68 per cent (as of March 15), led by higher prices of manufactured products and fuel items. Inflation was well within RBI’s projections of 5 per cent a month back, but the

recent spike has dampened rate cut expectations for April. The government’s borrowing calendar has been front- loaded to the first half of the next fiscal year.

The central bank is faced with a fresh dilemma due to slowing growth and rising inflation. But the government’s focus will be on the latter, ahead of elections and the policy response is likely to be through fiscal measures and followed up by monetary measures. The continued firmness in global commodity and energy prices may result in the central bank holding rates unchanged for an extended period.

FRANKLIN TEMPLETON INVESTMENTS

In my opinion, the private credit markets have forfeited their privileged right to operate relatively autonomously because of incompetence, excessive greed, and in minor instances, fraudulent activities. As a result, the deflating private market’s balance sheet is being re-nationalised in some cases with increased regulation, in others with outright guarantees and agency lending. Ultimately government programmes which support private credit market assets may be required in order to prevent an asset deflation of significant proportions. Authorities must act quickly, with a shot of adrenalin straight to the heart of the problem: home prices. Since homes are the most highly levered and monetarily significant asset that American consumers own, if they decline much further they will drag the rest of the economy with them. Supporting home prices goes counter to the thinking of Republican orthodoxy. President Bush and Treasury Secretary Paulson argue that markets must “clear” in order to avoid similar mistakes made by Japanese authorities in the 1990s. Yet we may have passed the point of no return for “clearing” markets. Home price declines of 20 per cent are in fact much more of a shock to the American economy than the popping of the Internet bubble and Nasdaq 5000, because the amount of homeowner leverage is so much greater. A 20 per cent negative adjustment not only wipes out all ownership equity for millions of Americans, it turns their homes “upside down” – incentivising them to let their gardens grow weeds instead of lettuce.

INVESTMENT OUTLOOK, PIMCO BONDS

Indian market still remains one of the most expensive relative to other markets; however, given the expected growth rate in the future, the market is attractively priced in. Though the slowdown in IIP (Index of Industrial Production) and higher inflation remain a worry, advance tax numbers have been buoyant and should reflect in March ‘08 quarterly results. We believe Indian equities are reasonably priced and investors with a long-term perspective should start investing now. Debt market is still wait and watch. If yields move up further in the short term, longer-term investors can start allocating money to income/gilt funds.

OPTIMIX VIEW AND OUTLOOK

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