I tried to step back and make sense of all of this. What does this mean? And how can one position oneself for this? First, some (foolhardy?) predictions:
- The Indian economy will continue to chug along at around 7% real growth. High interest rates will continue strangling retail credit growth and corporate investments, and GDP growth will moderate by a couple of percentage points. Real estate, autos will be damped. However, domestic sectors like consumer goods, telecoms, infrastructure sectors, financial services will continue to flourish.
- The rupee will continue to appreciate, driven by inflows of arbitrage seeking capital, keeping IT, textiles, auto component sectors under stress.
- The government will try fiscal stimulants for maintaining growth - effectively, tax cuts, increased infrastructure creation, populist sops. However, in an election year, there will be high sensitivity to inflation, so money supply will be curbed with continuing high interest rates. All of this will crowd out private investment.
- The US consumer-led slowdown will cool growth worldwide, and bring down prices of commodities like metals, oil, shipping etc. However, demand from India and China will keep oil from falling below $50-60 per barrel. This will lead to continued creation of petro-dollars, which will continue buying distressed assets in the US. Eventually there will be a backlash, and the petro-dollars will flow into markets such as India.
- After a while, investors will realize that India is a good place for generating returns, and this will cause a slight re-rating of the equity market. In other words, goodbye to 40%+ returns, and hello to more stable 15-20% type of returns for a year.
Of course, all of this may not come true. The US economy could probably be made to have a 'soft-landing' due to the Fed's rigorous rate cuts. However, this would create conditions for the next crisis 5 years down the line. There will be more empty talk of 'de-coupling' of India, but after a decade of 8% type GDP growth, this de-coupling will actually happen.
Our kids will probably see that happen. Till then we will periodically squeeze out the excesses in our asset prices in 5 year cycles (note that the last two depressions in India happened in 1996-97, and then 2001-02). So watch out for 2012-13!!