8:38 AM
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Hours after the US averted a default, large European countries found themselves in danger zone. Even as global investors grappled with the possibility of a US slowdown -- a phenomenon that will adversely impact stocks across markets --banks and institutions dumped Euro sovereign bonds amid growing fears that Spain and Italy were being pushed towards a defaultlike situation. European stocks fell after Asian markets opened weak on Wednesday. Mirroring the weak Asian markets, Indian stocks, too, extended their retreat on Wednesday. Investors are anxious that the possible turbulence in US financial markets, in case of credit downgrades by rating agencies, coupled with spending cuts by the government, could push US into a recession again. “Markets are worried about various issues, including the weak US economy, European debt problems, and the risk of inflation staying at elevated levels in India. US may have managed to avoid a default, but the economy is moving from bad to worse despite the QE2.
European markets fell 1% on Wednesday, as yield on Italian and Spanish bonds expanded on worries that the debt crisis is far from over. Back home, investors are also fretting over the prospect of inflation remaining higher.I expect agriculture GDP growth to moderate to around 2.5% YoY in FY12 from 6.6% in FY11, due to below-normal rain levels in July and August and a record year of foodgrain output last year.
The government’s proposal to increase rural spending has also not gone down well with investors on fears this step would negate the RBI’s efforts to clamp down inflation through monetary policy tightening. The central bank may resort to further increases in policy rates if inflation does not mellow that could result in a sharper economic slowdown.
“The central bank made it clear that the onus of inflation control now rests squarely with it given that commodity prices have not eased and the government may not be able to chip in with supply augmenting measures in the near term. Thus, rate hikes may continue till core inflation falls decisively or GDP growth slips below 7.5%.” This may further squeeze corporates, which are already reeling under the impact of rising borrowing costs and higher input costs.
“The central bank made it clear that the onus of inflation control now rests squarely with it given that commodity prices have not eased and the government may not be able to chip in with supply augmenting measures in the near term. Thus, rate hikes may continue till core inflation falls decisively or GDP growth slips below 7.5%.” This may further squeeze corporates, which are already reeling under the impact of rising borrowing costs and higher input costs.