ECONOMIC BOOM OVERRIDES STOCKS MELTDOWN & FARM NEGATIVES

December 19, 2006 (Press Release) -- Even as American, European and Japanese economies reveal trends of about half a percent slower growth this year over the past few years’ rise of 2.3%, India, China, Brazil, much of Asia and South America are on an upward trajectory. For the first time after a long time, moderate Western recession is not affecting the developing countries excessively. Yet, after bouncing bourses in the first week of December, the Bombay Stock Exchange Sensex, which crossed the 14,000 mark for short spells in two days, has seen a bloodbath of sorts in the second week of December, having dropped below 13,000. At the same time, Nifty, which had stayed above 4000 for several days, is now down to 3,700. The markets around the world are slowing down and worldwide stock markets tend to remain in step, even if not always.



At the same time the Prime Minister has promised a 9% growth for India over the next five years. He has also promised to keep inflation in check. The Reserve Bank has promptly reduced money supply by asking the banks to increase their currency reserve ratio and pushed up the lending rate. This tough decision first hit banking stocks, followed by foreign institutional investors engaging in a big sell off to push the stock market down in India. But the Sensex is still performing better than the Dow on the Wall Street, which is a benchmark. But the Finance Ministry and the Government remains bullish on the economic front and feel that jumps and falls are not an unusual phenomenon on the stock markets. December is a time when companies pay quarterly advance tax and high net worth individuals tend to cash some of the stocks to comply with the taxman. Even mutual funds are doing the same for tax or other reasons like making a killing. It is possible that the markets will start going up in the New Year, if not earlier, until Budget Day on February 28, but there is a tendency of a slide immediately after the Budget, again for advance tax payment reasons.



In fact, the US and Europe are trying to keep their markets and industries well supplied by sourcing much cheaper goods and services from outside—India, China and the rest of the world--to escape an overall downturn or what is nowadays called negative growth or a depression of sorts. One of the reasons for western slowdown is a slight increase in crude prices, which are now above $60 a barrel after having dipped below that level by almost $3. Winter may push the price up to $65 in the coming weeks, particularly if the Organization of Petroleum Exporting Countries or OPEC engages in further cuts in production, but they realize that they cannot afford to raise their prices too much as a greater recession would hurt them as well. They have to strike a balance and not try to be greedy.