Dear Niveshaks,

The current financial crisis has illustrated how the world markets have moved closer to each other and have become so interconnected that every move in every economy is now being catapulted to the global arena. Every piece of information is being analysed for signs of economic conditions. In fact, if we go by what is being written in press, right from high inflation, dismal growth numbers, hiring freeze and poor earning guidance by corporates, we can fall into a false sense of belief that our economy is already in midst of a recession. The Indian economy today is seen as so interconnected and dependent on the western economy that any problem in the western economy is automatically seen as trouble for the Indian economy as well.

However, if we analyse the situation carefully, the Indian economy is surely slowing down, but is not in the same mess as developed economies. The Reserve Bank of India has forecast a GDP growth rate of 7.7 per cent in FY 2011 while the UNCTAD has pegged the figure a shade lower at 7.6 per cent and the broad consensus among most economists is that it is unlikely to be lower than 7 per cent. Four years ago, if anyone had said the country would grow at 7 per cent, we would have taken it with glee, but three years of 9 per cent growth and talk of touching double-digit expansion had spoilt us. The fact of the matter, that Indian growth story is still intact and what we are seeing now is probably only a temporary phenomenon. The inflation rate is declining; overall domestic demand is growing, though not at the feverish pace of the last five years and jobs are being created, albeit at a slower pace than before though cost pressures have increased. Under the circumstances, the mood of despondency that has set in is unwarranted.

The currency space around us is on the verge of major transformation. The last time something big happened in currency space was in 1971, when the gold standard was abandoned by the then US President Richard Nixon. The move resulted in huge trade imbalances and a massive build-up of foreign currency reserves by countries like China. Something big is all set to happen again in the currency space with the new proposed currency bill by US. The bill is essentially a form of trade protectionism that intends to penalize China for keeping its currency at artificially low levels to boost its exports. The bill not only in violates a series WTO rules, but would also potentially dampen the global economic activity and increase the probability of a double dip recession.

This issue brings to you some more interesting and insightful topics. The cover story this month focuses on the Occupy Wall Street Protest and its implications for the US as well as global economy. The issue also features an article on the Private Equity Industry in India and the road ahead for it. Other articles in this issue focus on infrastructure financing and entry of private players in the Indian banking sector. The Classroom this month explains various types of Fixed Income Securities. We would like to thank all those who have contributed articles to this issue and sent entries for Fin Q.

Hope you find this issue an interesting read.

Stay invested.

Rajat Sethia

Dear Niveshaks,

The world economy has been in a bad shape since some months now. The Fed’s announcement of $400 billion ‘Operation twist’ to stimulate the US economy sent global markets on a free fall. The earlier monetary easing by Fed ‘QE2’ failed to revive the US economy and the market seems to have lost faith that the new avatar of monetary easing is going to help either. The Indian markets fell by more than 4% on announcement of monetary easing by Fed, its highest fall in a single day since 2009. The volatility in all markets have increased to an unprecedented levels and the possibility of a double dip has increased further. Fear Index VIX, which is based on volatility has increased by 22% for Indian markets in September and has reached high levels for most markets. Adding to the woes is the Euro crisis which has been worsening every passing day. The possibility of a Greek default is now very real. The Euro crisis which was born out of fiscal profligacy and mispricing of credit risk has now attained a massive scale threatening the disintegration of Euro itself and no Euro zone country seems to be knowing the solution to the crisis.

Meanwhile, the growth of Indian economy has stalled, thanks to RBI, which has been on an ‘interest hike’ spree for quite some time now. However, all the measures by RBI have failed to contain the inflation and the hawkish tone of RBI Governor is scary and an indication that interest rates can be increased further. Unlike the Americans, Indians do not live by credit, and hence a credit squeeze to contain demand may really not be effective in India. When inflation is driven by high prices of food and other basic necessities, a credit squeeze can hardly help, as Indians are unlikely to buy food on credit. This is not to argue that economic growth is the only priority and inflation does not matter, but it is simply unacceptable that economic growth is hurt while inflation remains unchecked. The fact is that the Government can do little to check inflation in an open economy. As a corollary, if commodity prices were to fall in the event of a double-dip recession, the government can hardly claim credit for bringing prices under control. When it is already known that the current inflation is largely driven by high food and raw material prices, squeezing credit to agriculture and allied activities can only make inflation more persistent. But inflation is a political issue and the government must show that it is taking efforts to check inflation. Hence these rounds of interest rate hikes.

This issue brings to you some more interesting and insightful topics. The cover story this month focuses on the outlook of the world economy and whether the ghosts of 2008 will return to haunt us. The issue also features an article on the genesis of Euro Crisis and the way forward for it. Other article focus on down-grade of US, India’s fiscal deficit and whether dollar can replaced as the reserve currency in the coming years as the US economy is losing steam. The Classroom this month explains the topic of Currency wars. Last month, we celebrated our third anniversary with a special issue on Sector Reports. The Anniversary issue was a huge success with more than 100 entries for Sector Reports. We would like to thank all those who contributed the Sector Reports and made our anniversary issue such a success

Stay invested.