The BSE sensex has shed almost 10 percent this year, the worst performance among Asian nations, compared to 17 percent returns that it gave last year. A fall of 20 percent in the key indices is generally considered a bear phase.
Inflation has become the biggest threat to growth and RBI is finding it tough to rein it in. Even after eight rate hikes in the last thirteen months inflation didn’t seem to be coming under control. The March end figure of 8.98 percent had everyone convinced that RBI will have to continue its rate hike program. RBI, in its mid quarter review on 3rd May increased key lending rates by 50 basis points, 25 basis points more than what market experts had expected. This clearly shows that the RBI has woken up to the fact that strong measures are needed to stop inflation from spiraling out of control.
RBI Governer D. Subbarao, said that controlling inflation is essential to maintain the medium term growth of the economy, even if this means sacrificing growth in the short term. Experts predict RBI to continue its hawkish stance in the near term.
Economic growth forecast for this year is at 8%, down from 8.6% last year. Foreign funds have pulled out close to 2,000 crore in the last few days. Easy money was the key driver for the rise in equities in 2009-10, but is coming to an end as the US Fed might end some of the monetary measures it initiated to spur growth. This will reduce the amount of investments by FIIs.
Investors are worried about the rising funding costs as well the rising input costs which will hit the earnings of Indian corporates. The tough stand that policy makers are taking to control price rise by sacrificing some amount of growth is another factor that has the investors worried. Market experts are warning investors to be prepared for some pain in the short term.
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