Thursday, October 29, 2009

Indian Stock Market : Oswal Cautions Indian Investors

 Interesting to see some high profile investors are starting to issue warning signals on the Indian markets.  Local Indian participants are blaming this on the RBI's decision to start tightening, but regardless of what the majority of Indian investors may believe, the Indian market remains a leveraged play on U.S. equities.  The selloff in global markets originated in the U.S. and made it's way over to Asian markets.  Despite conventional wisdom, Indian equity markets continue to be coupled with the global economy.

Indian equity markets may see a sharp fall any time soon as corporate earnings fail to match up to the investors' expectations, making shares increasingly expensive for buyers, Motilal Oswal, Chairman and Managing Director of Motilal Oswal Financial Services Ltd, said.

Oswal said two of the biggest concerns for inventors in Indian stock market are the government's fiscal deficit and a likely flare-up in wholesale price inflation.

Fiscal deficit, the difference between the government's total spending and revenues, is expected at 6.8% of the gross domestic product for the current year. The government was committed to bringing down its fiscal deficit to 3% of GDP by 2008-09, but ended the year with a deficit of 6%. Aggressive spending to their economies, even as revenues plummeted, has led to yawning fiscal gap in most countries.

A high fiscal deficit would mean that the government makes greater provisioning in budget for debt servicing, instead of spending on physical and social infrastructure. Increased market borrowings by the government to bridge the deficit can lead to credit squeeze and put pressure on interest rates.

"Inflation is a big concern for the market. We think it (wholesale price inflation) will cross 5-6% by early 2010. Whenever inflation sustains at these levels, market usually tanks," Oswal said. "That will be the time when the government may start rolling back the stimulus," he said. The government has said the economic and fiscal stimulus given in the past year will continue at least until the end of the current year.

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