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Is the Worst Over ? Where are We headed ?

September 24, 2008

Two big shocks for the Indian Economy were – High Commodity prices and Inflation thereof combined with Global credit crisis. The former had the most negative consequences on the health of Indian economy while the latter will have a minor impact on it.

The interest rates have peaked, and in the current global environment, the central bank will remain in liquidity injection mode. Second, lower oil prices takes away a significant risk. Third, the monsoons, another critical concern for agriculture and overall growth, have been near normal and spread widely. the financial sector remains essentially sound, mortgages are a fraction of total credit, and exposure to inflated real estate is small.

However we are still into the downturn of the business cycle, with growth slowing and earnings downgrades yet to come, valuations are still not too cheap. Concerns remain on the fiscal deficit and political risks, corporate spreads have increased significantly, and the deterioration in the global environment with continued risk aversion suggests that the forecast is still far from sunny.

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