Clouded Crystal ball

It's the season of mixed signals. Analysts in the US are unable to discern any definite direction from the minutes of the last Fed meeting, and, Indian investors are being confronted by falling markets and record gross domestic product (GDP) growth. This is not the only dilemma. Commodity prices too are the topic of intense debate. There is agreement that commodity prices have spiralled this year (even with the recent retracements), but no one knows for sure whether it is a bubble or just slightly-out-of-hand speculation on strong fundamentals. The US Fed too has left analysts unsure; the Fed thinks there is a possibility of inflationary pressures easing on account of cooling economic growth. To investors around the world, this means uncertainty about how long Fed rate hikes will last. The prospect of a seventeenth rate hike in June has already spooked global and American markets. An employment data report set for release on Friday is expected to give the Fed more food for thought.
What does all this mean for India? The answer is not too clear. The economy has recorded its strongest ever growth rate. Corporate earnings growth has been sound and along expected lines, price-to-earnings ratios too are not seen very much out of whack. But, the FIIs have pulled out almost $2 billion in May 2006. The shift of global liquidity to safer options like US bonds, redemption of emerging market funds, the expected change in the stance of the Bank of Japan and its impact on the liquidity fuelling the yen-carry trade, and India’s relative unattractiveness compared to other emerging markets have been touted as the prime reasons. Leveraged local positions have added pace to the decline. In the midst of all this is a report that Franklin Templeton Investments is launching a BRIC fund in the US; India is one of the ‘Bric’ countries. The fund is already available in Europe and the sobering thought is that the weightage to India is the lowest of the four countries. Amongst all these imponderables, volatility seems to be the only certainty.

-- The Economic Times Editorial