The glory of financial markets

The year that has gone by has been one of the best for the Indian financial markets. The equity markets, of course, have hogged the limelight, growing 13% from the May 17 crash.

On Friday last, the BSE sensex closed at 6602.69 and the NSE at 2080.5 points, their lifetime highs. Going forward, some of the major positives that should see the equity markets thrive are the end of the textile quota regime, reforms in the banking sector, introduction of product patent laws in the pharmaceuticals sector, and government's thrust on infrastructure development in the country.

At the beginning of 2004, inflation was at around 5.57%; currently, it's at 6.5%. On the face of it the difference between these two figures is not large.

However, during the course of the year, the rise and fall of inflation, week after week, was keenly watched and factored into by the financial markets. With interest rates continuing to rule low, the rise in inflation was a matter of concern for the government.

To contain this rise, liquidity was tightened leading to some hardening of interest rates towards the second half of the year. This process should see further progress in order to neutralise the effects of any sustained US rate hikes. For, any rate hike could render investments in the US more lucrative and funds could flow out of India to the US over a period of time. 

Petroleum product prices have been on an upswing too. Figures released on Friday indicate that the country's balance of payments (BOP) position fell back into deficit during the July-September 2004 quarter for the first time in four years on the back of a mounting petroleum products import bill.

The current account deficit was $6.42 billion compared to a surplus of $3.16 billion a quarter back. In fact, this was the first current account deficit in over a year. The BOP too showed its first fall since July-September 2000 - a $634 million shortfall compared to a surplus of $7.52 billion during the April-June 2004 quarter.

This is despite the strong inflow of foreign exchange into the country (forex reserves currently stand at record levels of $130.6 billion.) However, in the coming weeks, petroleum prices should not see any significant increase as the scenarios of acute demand increases have mostly been factored into.

Going forward, the rupee is expected to maintain its strong performance in the New Year. One significant event in this regard could be the revaluation of the Chinese currency, the Yuan. 

Whenever that happens, the Indian economy stands to gain as some of Chinese exports, such as textiles, could become dearer in the international markets giving that much leverage to Indian exports.

This will, in turn, strengthen the rupee. Moreover, with a stated view of the US establishment that the dollar is better weak for now, the rupee should continue to remain strong.

The bond markets have seen significant developments during 2004. This process will gather momentum during the new year, resulting in more players and instruments entering the segment, thereby lending it greater depth.

With investment in instruments such as the US government bonds currently being less lucrative than Indian government bonds (in terms of returns), the Indian debt markets should see sustained activity.