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India's Stock Market: The Bear Case |
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Tuesday, 24 July 2007 |
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Bears see storm clouds gathering on India's horizon. After six interest rate raises since November 2005, bears worry that further monetary tightening will inevitably crimp economic growth. That stands in stark contrast to the bulls, who believe that India is probably at the top of the rate cycle.
The bears also view a strengthening rupee as a problem. India's central bank appreciated 13.6% against the U.S. dollar so far this year, using it as another arrow in the quiver to combat consumer price inflation, which stands stubbornly at 6.6%. But a strong rupee has negative effects for corporate India as over half of revenues come from exports or dollar-denominated commodities. Inexperience with rupee strength also means that few Indian companies have a hedging strategy in place to address the vagaries of the currency market.
Bears are also less cavalier than the bulls about dismissing political risk. National elections are set for around 2009. If the Third Front -- an alliance of regional parties that excludes India's two largest parties-wins -- the market would sell off sharply. Indeed, when a BJP led coalition was defeated in 2004, the market fell 17% in two days.
The overall verdict? Bears are cautious in the near term, But even they concede that in the medium and long-term, the prospects for the Indian economy -- and the stock market -- are strong.
Source: Global Bull Market
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