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SLOWDOWN IN THE MAKING

Shubha Ganesh

The Economic Times, September 28, 2008

After months of denial a consensus opinion is now emerging that we are in an economic slowdown. Periodically, leaders from all walks of financial markets have assured investors in the past that the economic problems were short-lived and linked to the crude oil prices. The sharp fall in the stock markets was supposed to be a temporary phenomenon and it was expected that we would see a resumption of the bull market soon as India would maintain a 9 per cent GDP growth.

However, eight months after the initial fall macroeconomic fundamental do not indicate a 'V-shaped' recovery in the stock markets. The global sub-prime problems just grew bigger, crude prices are choppy, inflation though steady is still over 12 per cent, and a new dimension in the form of weakening rupee was added to our worry basket. Finally, everybody is coming around to a consensus opinion that it will take some time for the stock markets to capture old highs, and probably there is some more pain left before we tread the road of slow recovery.

Crude versus dollar

A few months ago analysts felt that once crude prices fell, the markets will recover. With the benefit of hindsight we can now say that the direct correlation and perfect hedge set up between oil and the domestic stock markets seems very simplistic as no one foresaw the weakening of the rupee and its impact on the landed cost of oil in rupee terms. The fall in the price of crude was offset by the sharp depreciation in the rupee. Hence, exchange rate fluctuations kept crude prices high in rupee terms despite its fall in dollar terms.

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