gfiles magazine

October 19, 2012

dr gs sood
Watch the bull run
Happy days are here again. The markets have moved fast in the last couple of weeks, cheering the recent policy announcements by the Government and abundant liquidity unleashed by central banks of the world’s major economies.
In what appeared to be a reforms blitz, the UPA government besides declaring support to the domestic mutual fund industry announced a Rs 5 per litre increase in diesel prices, capped the subsidy on LPG cylinders, allowed FDI in retail, aviation, power trading and broadcasting services, declared disinvestment in public sector undertakings even as it constituted a panel to study the controversial tax proposals under the General Anti-Avoidance Rules (GAAR).
The markets responded positively and decisively to these policy pronouncements. However, some economists continue to be sceptical about the positive impact of the announcements, citing the long and uncertain time lag between the implementation of the reforms and their impact on the economic upturn.
I am of the firm opinion that the market operates mainly on sentiment, with fundamentals playing only a secondary role. The fact that foreign institutional investors (FIIs) poured in more than $1 billion within a week of these announcements speaks volumes about the role of sentiments. The response was all the more exciting due to the fact that the markets were not expecting such announcements and that too in such a bold manner, with the UPA government even opting to jettison a key ally. The sentiments, when they turn for the good, can create a series of reactions bringing in more things into play, increasing liquidity thereby preparing the capex cycle to restart and strengthen the rupee. This also has its impact on containing the fiscal and revenue deficits, and inflationary pressures that a weak rupee is said to create.........READ MORE

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