God to India's rescue - Strong case to overweight Equity

Mannu Singh, who was in financial difficulty, walked into a temple and started to pray. ''Listen God -I know I haven't been perfect but I really need to win the lottery. I don't have a lot of money. Please help me out.'' He left the temple, a week went by, and he hadn't won the lottery, so he walked to a church ''Come on, God,'' he said. ''I really need this money. My mom needs surgery and I have bills to pay. Please let me win the lottery.'' a week went by, and he didn't win the lottery. So, he went to a mosque and started to pray again. ''You're starting to disappoint me, God,'' he said. ''I've prayed and prayed. If you just let me win the lottery, I'll be a better person. I don't have to win the jackpot, just enough to get me out of debt. I'll give some to charity, even. Just let me win the lottery.'' Many thought this did it, so he got up and walked outside.

The clouds opened up and a booming voice said, ''Mannu, my son please please please.....atleast buy a lottery ticket.''

Similar is the situation of India. Right now we want our growth to be in place, inflation to be under control, rupee to get stronger, get rid of corruption, reduce current account deficit, reduce fiscal deficit. 

By looking at India's Pathetic situation it seems god has felt pity on us and have bought a lottery ticket and served it to us on a platter.

The biggest worry for India as of now is twin deficits i.e. Current account deficit (CAD) and Fiscal deficit. Although our finance minister is making sincere efforts to control it, by increasing import duty on gold , reducing subsidies, cutting expenses etc. etc  but all efforts are in vain. 

It seems suddenly god has listened to prayers of all the Indians.

As mentioned in my earlier Blog  "Gold : Is it really safe anymore????" ( I did pointed out that gold can't keep on increasing and would see drastic fall when positions unwinds)  In its report RBI points out, as a ratio to the CAD, gold imports were a whopping 71.9 in FY12. As a proportion of the balance of trade, gold imports were 21% in the first half of FY13. So gold import is biggest negative for our balance of payment. With recent fall of almost 15% in gold prices will breathe a big sigh of relief and will improve our CAD.

Apart from gold another big worry for India is OIL. India imports over 70 per cent of its oil demand. So a 10% rise in oil prices result in a 0.6 percent fall in growth while in the full pass-through situation, it can reduce the growth by 0.9 percent and vice versa. The Best news is that even oil has corrected to sub $100 level for 1st time in 9 months is big positive for us.

Fall in prices of Gold as well as Oil will help us to bring down current account deficit, which will inturn strengthen our currency.

Subsidy on Diesel and Kerosene adds up to our Fiscal deficit and increases inflation. So fall in oil prices also narrows down the fiscal deficit as well as inflation.

Icing on the cake is that WPI inflation has fallen to 40 month low of 5.96%.

From the above facts I strongly feel that RBI has to completely change its focus from fighting inflation to growth, which will help in generating jobs and help corporates to grow. We can expect rate cuts from RBI in policy review due on May 3rd.

All the biggest concern as far equity market is already addressed by falling Gold Prices,Oil Prices and Inflation which lays down a strong foundation for start of a new bull run. I don't say that market will start performing immediately. But, from asset allocation point of view it is time tor rebalance your portfolio and if your are into tactical asset allocation its time to be overweight on equities.