Inflation declines unexpectedly to a six-month low of 8.98%.
Is it good or bad for the markets??
We think declining inflation numbers are bad news for the markets because the fall is entirely due to vanishing demand. Inflation upto a point had been good news for the markets because it always indicated strong demand unmatched by adequate supplies, giving businesses an opportunity to make extra profits. Rising inflation actually pushed up the indices and the entire rally of 2007 was due to inflationary situation benefiting corporates.
Now we are witnessing a reversal in demand, and supply suddenly seems to be too much, resulting in a crash in commodity prices and therefoe declining inflation. But we don’t think the downcycle has played out fully.
While, during the upcycle companies were announcing mega expansion plans, now they are being forced to defer / cancel those plans for two reasons: decline in demand and shortage of capital.
Declining inflation will certainly mean reduction in interest rates over a period of time, but that does not mean funds will be easily available. Companies which have strong balance sheets and have been prudent in their capex plans will certainly be benefitting, but companies that have overextended themselves will get into a big mess going forward.
We stand by our reading that the bear market still has a long way to go. The markets will turnaround only when no has any hope left and everyone is sure that the downturn will carry on for ever!!
Our good wishes are with you, and we hope that you will be able to tide over this phase comfortably.
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