How the American meltdown will impact India

The US financial meltdown – which has seen the collapse of investment banks like Bear Stearns and Lehman Brothers, and the humbling of powerhouses like Merrill Lynch and AIG – will have a roll-on effect in India, too. Apart from the psychological impact of the crash of Wall Street giants, the imminence of recession in the US economy and pullout of funds from emerging markets by cash-hungry institutions, here’s how the meltdown could affect us.
Stocks: Companies in the real estate and infrastructure sectors will be hit. “Capital-intensive sectors like infrastructure will face problems,” says Mahesh Patil, fund manager, Birla Sun Life Mutual Fund. Anuj Puri, chairman and country head, Jones Lang Lasalle Meghraj, a real estate consultancy says, “Foreign capital for private equity investments in Indian real estate may see a temporary downturn, causing the stocks of listed companies to decline. However, we expect normalcy to be re-established once market sentiment recovers.” But with stock prices down, this may be a good time to invest. “Spread your investment through systematic investment plans over the next six months as there might be a further downside of 10%,” Patil says. But be prepared to wait 3-5 years for payoffs.
Real estate: The long-overdue price correction is on its way. “For the residential segment, prices will go down in the top eight cities but the degree of fall could vary. The correction could be around 20-25% across the board after Diwali,” says Ambar Maheshwari, director in Mumbai for international real estate consultants DTZ. Investors and speculators are best advised to stay away from real estate. “In smaller towns, the real estate market is dead. Even in Mumbai, as interest costs go up and debt becomes scarce, you will find that a buyer is willing to wait,” says Kenneth Andrade, vice-president (equities), IDFC Mutual Fund.
Jobs & pay: According to Surabhi Mathur Gandhi, general manager, permanent staffing, at Bangalore-based TeamLease Services, there could be a 25-30% drop in the hiring of freshers by the IT, banking, financial services, and insurance sectors. Moreover, pay hikes next year will be much more conservative than earlier. On an average, average pay hikes may be pegged at round about 10%, or even less, says E Balaji, chief executive officer of Chennai based HR consulting firm Ma Foi Consultants.
Infaltion : Currently, inflation stands at 12.14%. Experts feel it might go up even further. Says Rupa Rege Nitsure, chief economist, Bank of Baroda, “I think the scanty rainfall in Maharashtra, Gujarat and Madhya Pradesh will add to price pressures with the prices of pulses, edible oils and sugar going up. This could see inflation rising to 14.5% by December-end.”
Interest rates: When inflation remains high, interest rates will not come down too easily. “I think rates will start coming down only from the next financial year,” adds Nisture. Hence, those looking for lower home loan EMIs will have to wait. On the other side, fixed deposits are likely to give you greater returns. On the bright side, however, with the world economy slowing down, interest rates have probably peaked – and that could be the case in India, too. This may be the time to lock into variable rate loans, since you could benefit from any downtrend – whenever that happens. Fixed-rate loans may not be a great idea anymore.
Gold: Demand for the yellow metal is usually low in India during the inauspicious ‘shraadh’ period, but this year the trend has reversed as a result of the American banking crisis. The bad news in America has forced investors to transit to safer havens such as gold.