Market Watch: Tackling macro setbacks
The government knows it is powerless in tackling this inflation and is almost venting it's impotent fury on a few chosen sectors. Udayan Mukherjee writes.Updated: Apr 12, 2008 01:07 IST
Inflation for this week was worse than expected, IIP was better. The market didn't sell off on the WPI number perhaps because it had already steeled itself for the shock. Nevertheless, it's always encouraging to see a market shrug off bad news and move on. Inflation will probably ease a bit in a fortnight but not for good, it's still a long trudge ahead. The IIP number was a relief but the extra day in February this year may have accounted for a large part of the surprise. Net net, macros still remain dodgy for us.
Yet what is more worrying is how we are trying to deal with these macro problems. The market seemed unruffled by the WPI number but policy makers were not. Out came a ban on cement and primary steel exports and withdrawal of some export benefits. The government is behaving like an angry child. It knows it is powerless in tackling this inflation and is almost venting it's impotent fury on a few chosen sectors, little realising that not only will it not have the desired effect but will only send out terrible signals to manufacturers and to the world at large.
In fact, in the longer term it is is setting itself up for more rigidities on the supply side. With pricing and export clamps on steel, cement and farm produce, do you think manufacturers and farmers would be very eager to augment capacities in future? Why would anyone want to produce more of a commodity when the government does not allow it to profit from an upcycle? We are simply perpetuating a vicious cycle on the supply side in our bid to find short term solutions. That's band aid economics.
For the market, the downward momentum seems to have exhausted itself in the near term. Sell offs are no longer sharp and when they are they tend to be short lived. The visible negatives seem to have been priced in and the market will need fresh bad news to go down another leg. Of course, the potential triggers are aplenty : there's earnings, monetary policy and global newsflow and each of this can lead to a reversal quite easily. The second half of April is completely crucial. In it could lie the answer to whether we are anywhere close to getting out of the woods.