Equity Market Update
 
Markets lost almost 6% this week as global economic data kept on worsening and fears of global recession continued to adversely hit the global markets. In India the falling commodity prices have started showing an impact and inflation has hit single digit after a long time at 8.98%. Banks were the largest losers with Bankex losing almost 7%.
 
Outlook for the week
 
The central banks across the global economies are cutting interest rates to fight the financial crisis and liquidity concerns.  This entire turmoil has had its collateral damage on all equity markets including India. Although fundamentally India continues to be least impacted, ‘collateral’ damage could not have been a ed and the large FII outflows primarily reflect ‘Position Liquidation’ and not any serious concerns on India growth story.

India, being a high savings economy with underleveraged households, is fundamentally least impacted. We are a domestic economy with a young demographic profile, unlike most other Emerging and Asian economies which are dependent on exports to the Western world for their growth. On the contrary, the falling commodity prices on account of global slowdown would benefit our economy. While a global slowdown will lower our growth as well, our ‘growth gap’ will remain intact or in fact improve over the rest of the world, mainly because of falling commodity prices and predominantly domestic nature of our economic growth.

While currently we are witnessing FII outflows from India due to so called ‘Risk aversion’, over a longer term we would see renewed interest in the structural stories of Asia and India in particular as the concept of ‘Risk aversion’ gets re-defined. We expect continued volatility in the Indian market in the short term, though, led by the global financial crisis.  We expect more divergence in sector and stock performances, in a broadly volatile market.
 
Debt Market Update

Outlook for the week

Inflation fell unexpectedly to 8.98% for the week ended 1st Nov 2008 as against market expectation of around 10.2%. Fuel price index was the main contributor to the fall as prices of naptha and jet fuel prices had been decreased following a sustained deep decline in the international crude oil prices. The fall is significant for the monetary policy in that the Central Bank may have more comfort with lower interest rates than it would have had otherwise.

Debt market yields have now fallen significantly from their peak levels in October. 1 year benchmark Certificate of Deposit rate has fallen to around 10.50% from around 12.50% at the peak. We believe that rates are likely to consolidate around current levels. Gilt yields are likely to decline further as inflation moderates.

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