COLUMN - Indian growth - the slowdown cometh

By Phil Smith

MUMBAI - The wall-to-wall media coverage of the stock market correction and financial turmoil elsewhere on the world’s exchanges has overshadowed some recent economic events closer to home which have significant implications for investors.

Those stockholders with a long time horizon may not be so panicked by the fact the Sensex has corrected back to its longer-term uptrend, or that its relative valuation against other Asian stock markets is back to more sustainable levels.

They should however be taking careful note of some recent developments that point to an economic cooling off, which obviously has broader and longer-term implications for buy and hold investments.

The latest shaker was Thursday’s weekly inflation which defied expectations by coming in at a bumper 5.92 percent. This compared with 5.11 percent in the previous week and market expectations of 5.21 percent. It was highest number in nearly a year.

As we have discussed previously, inflation in India, in the metropolitan areas at least, is much higher than the official figures would seem to indicate but the numbers are now backing up the anecdotal evidence.

Given Finance Minister Chidambaram’s hawkish comments on inflation in last month’s budget and the central bank’s very open endorsement of his stance there would seem to be no room for growth boosting cuts in interest rates.

With inflation numbers like this coming through, commodity prices rising, particularly food, and oil at $110 a barrel, the government and central bank are going to find it much harder to come down on side of growth over inflation. So don’t hold your breath for a rate cut, the chances the next move in rates will be up rather than down are very high indeed.

As if to highlight the dilemma, another set of data last week showed a very wobbly set of growth numbers.