'Murky Politics': Could burn a deeper hole in your pocket

The political scene in India is becoming murkier day by day. There is total anarchy in the functioning of our parliamentary democracy. In such a situation investors are advised to stay away from the equity market, and wait for the dust to settle. As things stand today, there is a total failure of governance and the blame has to be equally shared between the ruling party and the principal opposition party. The govt. of the day is in the saddle not because of its achievements but because of the 'TINA' factor. And the main opposition party is so bankrupt of ideas that it cannot think of coming back to power on its own strength, therefore, it is putting spanners in the functioning of the govt. The BJP's eternal 'PM in waiting' is making things worse for his party.

What could be the immediate fallout of this political logjam on the financial markets:

• Growth would suffer badly and the danger signals are fairly loud and clear. The GDP growth for Q2 has dipped to 6.9%, with core sector growth slowing to a meagre 0.1% and some sectors such as mining showing negative growth. The ongoing projects are already suffering due to lack of capital, while many sectors like power sector are facing an acute shortage of raw materials.
• The signals for the foreign investors are extremely negative, which is leading to a free fall in the value of the Rupee. Any further depreciation in the value of Rupee could lead to throwing the Govt's finances to the winds, the fiscal deficit coming under tremendous pressure. It is already threatening to destabilise several industries such as Aviation and Oil & gas.
• Imported inflation continues to haunt the policy makers. Higher inflation emanating from import of essential goods is not allowing the RBI to reduce rates despite being fully aware that the high interest rate regime is crippling growth.
• All the above economic factors would lead to a serious erosion in the earnings of our corporates, leading to downgrades across sectors. Ultimately the equity market will discount these earning downgrades and would punish the companies. Stock indices would follow siute with strong downward moves.

There is a very serious threat to a further erosion in the investors' wealth. The only way you can protect your wealth is to stay in cash, generate more cash by selling on every rise, and wait for a panic situation to emerge to deploy that cash. Many analysts are today talking of levels between 4100-4500 on the NIFTY to be achieved fairly soon. The temporary infusion of equity by central banks may push the Nifty towards 5000 levels in the very short term, which will present a golden opportunity to lighten your equity portfolio. And, god forbid, if the incumbent govt. were to fall, the chances of which are fairly high, the country may be pushed into a mid-term election.The equity market would seem like a 'bottomless pit' in such a situation, reminiscent of the 2008 doom. I sincerely hope this does not happen, but investors should be prepared for the worst case scenario and act accordingly.