Attention will focus on the US Federal Reserve’s Open Market Committee on 18 September as Ben Bernanke deliberates on whether to cut the US Fed Funds rate and, if so, by how much?

The futures market is already pricing in a 25 basis point cut, to be followed by two more cuts this year. The conventional wisdom is the market will be disappointed with a 25 basis point cut on 18 September and will rally only if the cut is 50 basis points. Observers have pointed out that the average Fed Funds rate for August was around 5%, 25 basis points lower than the target rate of 5.25%. So, a 25 basis point rate cut in effect has already happened. Citigroup economist Yiping Huang says in a recent report that he expects the Fed to cut rates by 50 basis points on 18 September and by another 25 basis points before the year-end.

What does this mean for the Indian market?

Apart from the improvement in sentiment, there’s also another factor. Huang’s view is that if the 75 basis points rate cuts in 2007 completely offset the slowdown in US growth, then it would accelerate Asian growth by 0.8 percentage points in 2008 and strengthen Asian currencies by an average of 0.7%.

The effect on India is relatively less, but it would add to India’s gross domestic product growth by 0.4 percentage points and strengthen the rupee by 0.6%. While, in the likely event of rate cuts not completely offsetting the slowdown in US growth in 2008, the impact on Asia will be larger.

In these uncertain times, what is an investor to do?

It may be best to take a leaf out of Marc Faber’s latest Gloom, Boom and Doom Report. He advises investors that “in the ongoing financial battle between the optimists, who expect a new high shortly, and the pessimists, who expect a new low before the end of October, the best course of action may be to only take small positions and to be patiently awaiting better entry points both on the long and the short side."

July IIP numbers blip

Is the sharp drop in the Index of Industrial Production (IIP) and the infrastructure index for July a one-off event?

There are several reasons for believing so. One of them is that the sharp decline in credit during the earlier part of the fiscal year is being reversed. Consider the data: During the three months from 1 April to 6 July, non-food credit declined by Rs12,094 crore, compared with a rise of Rs36,654 crore in the same period last year.

But look at the sharp pick up in bank credit since then. During the period between 6 July and 31 August, non-food credit rose by Rs51,284 crore. That’s comparable to the Rs51,646 crore rise in the same period last year. And in the month to 31 August, non-food credit rose by Rs32,802 crore,?more?than the Rs31,319 crore rise during August last year. The point is that credit growth is back on track and we no longer have the huge slowdown we saw in the beginning of the fiscal year.

We’re still not sure about the reasons for the rise—whether it’s because external commercial borrowings have slowed down and corporates are borrowing more, or whether consumption demand is reviving, seen from the rise in auto sales in August. If you consider that the category “Wood and wood products; furniture and fixtures" is showing the highest rate of growth in IIP, then housing demand seems to be rather good, because the demand for furniture and fixtures will depend to a large extent on the demand for new housing. A Citigroup note on the July infrastructure data says the reasons for the slowdown in construction indicators such as cement and steel are capacity constraints and shutdowns rather than lower demand.

The other reason for considering the July IIP numbers a blip is provided by the ABN Amro Purchasing Managers’ Index. The August reading of this seasonally adjusted manufacturing index was 57.9, the highest since last November. The bounce follows a July reading of 52.9, the lowest in the 29 months since the beginning of the survey. As Gaurav Kapur, senior economist at ABN Amro India pointed out, “these indicators seem to suggest that the contractionary impact of higher interest rates on local demand conditions, especially leverage driven spending, could be on a decline." The BSE Auto index is still underperforming the Sensex, but the margin of underperformance is diminishing and auto stocks are no longer getting bashed in the market.

And finally, consider the fact that excise duty collections in August surged 9% over the year ago level. In July, the year-over-year growth in excise collections had been a low 2.1%. That’s another reason to believe that industrial production will rebound in August.

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