A Passage to India

• Posted by Robert Sinn
• on March 29th, 2012

US investors tend to focus heavily on China and not much on its neighbor which is the second most populous nation on earth, India. This is partially due to the fact that India’s capital markets are under tight government controls and foreign citizens are only able to invest in Indian equities through ETFs/ETNS/mutual funds ($EPI, $IFN, $IIF, $INP) . India is also known as a hotbed of corruption and there has been a major battle taking place recently over graft within India’s political and governmental structures.

India’s main equity index, the Bombay Sensex ($BSE), has been mired in a grinding downtrend for nearly two years and has recently seen another quick ~8% sell-off:

 

One of my latest Twitter follows @vka27 sent me the following comments regarding some of the current challenges facing India:

“The Indian economy is facing a huge crisis in the short to medium term with the global commodities rising/remaining elevated along with the Indian rupee falling sharply which has created a risk of cost push inflation in a period of a strong dollar failing to push the commodity prices down.

In an environment in which the central bank is likely to sacrifice growth to tame inflation while the government is facing corruption allegations and with coffers needing to be filled, the prospect for business friendly policies look less likely in the near future. The growth story goes into consolidation phase with a serious risk to the downside as EUROPE & IRAN fears threaten to push the economy into serious trouble.”

While the energy price pressures are largely a result of a weak rupee and short term global supply challenges, India’s economy does indeed face some serious challenges going forward trying to tame inflation while maintaining economic growth. With the latest inflation readings coming in at 6.55% while GDP growth is running at a disappointing 6.1% rate, India faces a decelerating economy with negative real rates of growth which has clearly had a large negative impact on Indian equities. Meanwhile, there are some reports that India’s Central Bank may throw caution to the wind with regard to inflation and cut rates in order to spur growth. Investors should definitely have India on their radar during 2012.

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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