Oil is on the boil, commodity prices are at astronomical levels. The blame game is on. Who is responsible for this mess? Will the bubble burst soon? Indian economy is reeling amidst the global turmoil, leading the stock market into a tailspin. It is a global phenamenon, and its ramifications are much wider. Analysts are predicting crude prices to rise to 180-200 $ per barrel. Inflation indeces are steadily rising. The stock markets are worried because they discount the future.
According to 'Dr. Doom' Marc Faber it is natural that commodity prices to move inversly to stock prices, a phenemenon being witnessed currently. Essentially higher commodity prices lead to higher inflation which is bad for stock prices, and results in movement of hot money from stocks into commodities. However, the period between 2004-07 witnessed stock prices and commodity prices moving up simultaneuosly. The period 2001-02 witnessed depressed stock and commodity prices. According to Marc Faber it is easy to contain inflation through a loose monetary policy when commodity prices are low. The rise in commodity prices has been fuelled by the high growth asian economies (China & India). So this time the monetary policy of low interest rates followed by US Fed was counter productive in controlling inflation. RBI also delayed tightening measures till inflation reached double figures.
Finally, the FinMin and RBI have conceeded to the fact that some growth will have to be sacrificed for controlling the spiralling inflation. Protecting the growth in demand at this juncture might come at the cost of our fiscal deficit going out of control. India, as compared to China, does not have the option of a loose fiscal policy to counter the high interest rates. So corporate growth is bound to be hit negatively. But this does not mark the end of the 'India Growth story'. The rising rates of savings and investment in India will ensure that the growth vehicle is not derailed in the long run.
In the long run, India needs to look towards alternative sources of energy, to ensure 'Energy security' for the growing economy. Apart from Solar energy, Wind enrgy, Hydro power India must exploit the use of nuclear energy to tide over the energy crises. The recent move by the Govt. seeking ratification of Indo-US Nuclear pact is a step in the right direction. With the high crude prices these alternative sources of energy have now turned more cost effective and hence need to be harnessed to their full potential.
Now, coming to the important issue of the 'Crude Oil bubble'. Oil price rise has been contributed primarily by the speculative activity in oil futures, which has been admitted by FOMC. With the slowdown of global economy, the prices will soften sooner than later, and maybe in 6-8 months time we might see crude oil trading under $100 per barrel.
So, what lies in store for stock market investors? The markets which were predicted to rise to 17000-18000 level on BSE in 2007 surprised everyone by rising to iver 21000 in January 2008. The expectation now is BSE sensex going to 10000 levels, but the markets may yet again surprise the market pundits. A temporary bottom seems to have been made last week at sensex level of 12800 ( NIFTY 3850), and the markets would now be guided by the Ist quarter results, which are likely to provide a positive bounce. It is definitely a time to build a long term portfolio of bluechips.
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