What could be the next worst thing in financial markets (14 Jan 2011)

I wake up everyday and ask what could potentially go wrong in the Indian Stock market.. I have not got any convincing answers yet.. Many things come to my mind.. Domestic problems like inflation, interest rates, burgeoning current account deficit, scams and corruptions.. International issues like sovereign debt problems of PIIGS especially Spain and Greece, uncertain macro economic environment of US and Europe, alarming debt to GDP ratio of certain countries and premature asset bubble signs are worrying. Also any kind of unknown shock may also be not surprising. The cause of uncertainties is fairly reflected in the stock market where volatility is the norm in the last few days.

However one thing is sure. India is undergoing far larger domestic problems than ever like raising interest rates and current account deficit. Inflation though became a global phenomenon especially the food prices are raising astronomically everwhere. With US looking strong, dollar will gain strength and gold and other commodities will lose its value in short term, may be a 15-20% cut in next one month. This may happen coupled with the sheer reason of investors trying to secure profit from their investments in these asset classes. I am waiting for the policy action of RBI and budget to happen to see the future direction of the market. If i am a policymaker,I continue with bankers' request for not raising interest levels beyond a .25 basis point. Also will cut CRR and inject liquidity in the system to stimulate credit growth which is very essential for economic growth. The current inflation is fuelled by raising food prices which is more of supply constraints reason that requires long term actions and monetary policy has limited effect on it. So raising the interest rates will not serve the purpose. However I still expect a 25 basis point raise in interest rates. Coming to budget, India's fiscal deficit is at its high and expected to reach more than 5.5%, which is the projected number in last budget. So with twin deficits, current account deficit and fiscal deficit, it all says a reason that rupee will depreciate in coming days. Inspite of raising more than a lakh crore through 3G and IPOs and FPOs fiscal deficit is raising.. Thanks to commonwealth games, the money was burnt, keeping the fiscal deficit at bay. So coming year, i expect partial roll out of many stimulus measures that was given in last two budgets. Excise cuts in autos and no respite in direct taxes and more indirect taxes is on cards. The budget may be considered negative for stock market, that may trigger sell offs.

But who can say? Indian ministers can heed to industrialists and continue to frame policies that are anti-poor and have long term pains. Only time can tell, however i have decided i will sit in cash till the sky gets clear.