The Indian markets continued their climb with the BSE Sensex rising to 18000 levels and the Nifty crossing the 5300 mark during the quarter. The Indian economy continues to chug along at a robust pace and is expected to continue on this trajectory as evident from the recent forecast upgrade by the IMF (which has increased India's GDP forecast from 9.4% to 8.5%). The recent quarterly results indicate reasonable growth in revenues for companies though profitability has been impacted to a certain extent due to the escalating cost of raw materials. The consumption story continues to grow stronger by the day as evident from sales of categories like automobiles, consumer durables and non-durables, telecom etc.
While inflation continues to be a major cause of concern, the recent steps taken by the Reserve Bank of India should help contain inflationary pressures in the coming months. Also, given that monsoon progress has been near normal and with the base effect coming into picture, inflation should start subsiding in the coming months. This should help markets continue with their upward moment in the next few months.
On the fixed income side, the central bank has been taking quick steps to rein in inflation by increasing policy rates and attempting to put curbs on excessive liquidity by increasing for the second time the Repo rate by 25 bps and Reverse repo rate by 50 bps respectively. The repo rate now stands at 5.75% and the reverse repo at 4.5%. The impact of this is already visible with banks increasing deposit rates given the northward movement of interest rates. We believe that RBI will take further steps in the coming days as the focus shifts from facilitating growth to containing inflation.
On the Emerging markets front, China has taken specific steps to move from an extremely loose monetary policy to one focusing on normalization. This is a conscious attempt to put the brakes on its fast expanding economy so as to try and avoid asset bubbles from forming in areas like housing, infrastructure etc. The Chinese markets have corrected as a result of this policy action, declining by close to 20% in the current calendar year till date. We believe that this action was essential though the continuation of such efforts would need to take into account the changing global scenario. Similarly, markets like Brazil have shown resilience to the global financial crisis and are poised to grow at 5.3% in 2010E, a healthy rate compared to several global peers. Also, with the country hosting the 2014 World Cup and 2016 Olympic games, it will surely benefit from infrastructure growth and related developments.
While Emerging markets are already on the path of expansion, developed economies especially the US and Euro zone countries continue to witness the aftermath of the financial crisis with unemployment hovering around peak levels and consumer spending yet to take off in a meaningful way. Amid this, there are increasing views of developed markets facing further stagnation which could derail the recovery process in these countries. This is also evident from the action of policy makers including the Federal Reserve (FED) which has been upfront on its view of a prolonged period of recovery and has stated that it will maintain low interest rates for an extended period of time.
In a nutshell, Emerging markets are fast becoming the growth engines of the world and are increasingly being perceived as a force to reckon with in the coming decades. The argument that China may have already surpassed Japan to become the World's 2nd largest economy only adds substance to this emerging trend.