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Market Swings: Surviving tools for rough times

| 1/31/2011 6:45 PM Monday

S tanding below the iconic Jeejeebhoy Towers which houses the Bombay Stock Exchange, P D Dewani, a self-employed chartered accountant, looks slightly worried. On further imploration he admits being invested in the current market and sounds amazed at the way the mar-kets are behaving. Dewani is not just a one-off case. Look at P P Shah, an employee of a mid-sized company in his late 50s. Shah expects the Nifty to come down to at least the level of 5,500 before the market goes up again. Bullish on infrastructure and IT, he too is invested in the current market.

There is one common thread that is currently running through the thought process of investors like Dewani and Shah and that is the wildly swinging market. Rising interest rates, higher inflation, squeeze on liquidity, Q3 corporate performance, political uncer-tainty, and the global economic scenario have been sending the market on a roller-coaster ride for quite some time now. These are the kind of wild swing's in the market that impact investors. However, investors believe that the various factors that are responsible for these rather uncontrolled moves will be taken care of in time to come. “I am not really worried about the volatility. As far as this scenario is concerned, I am already seeing an impact on my portfolio but this is more of a concern for the trader community. I am a long-term investor and I am therefore not feeling as insecure,” Shah says.

His justification is that growth for the Indian industry will be very good going forward and that will take care of the situation. As far as factors like interest rates are concerned, the RBI will have to stage a balancing act on that front. “Though we can always say that inflation has to be controlled very soon, I don’t think that the government will be able to do so,” he says. The question is: How volatile is the Indian market? Take a look at the movement of the broader indices since Diwali. Between November 5, 2010 and January 24, 2011 the Nifty and the Sensex have declined by 8.5 per cent.

The problem is that the journey has been very painful with no clear indication of where exactly the markets are headed toward. During this period the Sensex has declined by as many as 492 points on a single day and on the other hand has also gone up by as many as 372 points on a single day. The volatile nature of the market between this period is clearly visible in the chart above. Having seen what the markets are behaving like, let us look at the various factors that are impacting the market and making it so volatile and also analyse what can be expected going forward.

Inflation And Interest Rates

As far as the markets are concerned, the two factors that are very heavy on the minds of the investing fraternity are the hardening interest rates and rampant inflation. This is just not lim-ited to the Indian market but similar seems to be case with the Chinese and the Indonesian markets too. Even these markets have been reacting sharply to inflation numbers and any news on the tightening of the monetary policy. Though these two factors are indeed considered the major culprits for increasing the uncertainty and vola-tility in the market, there are certain questions that come to our mind. First and foremost, is inflation really at such an alarming level? At 9.4 per cent for 2010, inflation is certainly steep and well above the RBI’s initial target of around 5.5 per cent.

 

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