Sunday 19 August 2007

Recovery on the way...

Having lost close to USD 100 bn in last 15 sessions on sub prime mortgage concerns, Dalal Street may hope for happier times ahead with improving global cues after US Federal Reserve cut the rate at which it lends to banks, even as some feel more steps were needed to tackle the crisis.

Indian bourses lost close to Rs 4,00,000 crore -- nearly 10 per cent in overall market capitalisation -- in just a fortnight of trading since July 27 after the credit crunch in the us economy spread across the globe.

While the Fed's decision to cut the primary credit rate by 50 basis points to 5.75 per cent came as a reprieve for us and European markets on Friday, domestic bourses, which were declared closed before the rate-cut was announced, will react only tomorrow.

Multiple crashes since July 27 have wiped off nearly all gains made by BSE in the past six months, while taking the benchmark Sensex back to January-February level. Analysts at global brokerage giant Merrill Lynch said the rate cut would not necessarily bring a sustained stability in the markets.

"Prior two asset and credit bubbles that unwound from 1990-92 and again from 2001-03 show that Fed cut interest rates 100 basis points, the central bank believed that it acted in time to prevent a recession or bear market," Merrill Lynch's North American Economist David A Rosenberg wrote in a research note after Friday's rate cut.

"But, recessions did follow the initial Fed rate cuts back then, and so did a cyclical bear market in equities. Not even the Fed could stand in the way of nature taking its course and expunging the bad credits out of the system," Rosenberg said.