Slowing growth and hyperinflation is the recipe for Sensex bear market – where is the real bottom
Rama Rao
May 13, 2008

Stock market technicians know that the nastiest combination for stock market is the slowing growth and hyperinflation. Economist call it the stagflation, stockbrokers call it the killer.

Where is Sensex bottom? When will the bear market end bleeding the India Inc.? When will Sensex start rising again?

These questions can only be answered looking at the past in some other countries. India’s real inflation is above 25% although Government tricks the people and the world by showing single digit inflation. The real inflation rate was close to 12% six months back.

It has doubled in six months. The problem is the rise in inflation is so steep and so sudden that the Government is unable understand how to tame it down. It is the toxic effect of wiring the globe together.

The hyperinflation in food and other essential commodities is the effect of trade globalization and energy subsidy in India and China.

Whenever developing economies have experienced more than 10% rise inflation month over month for more than six months, a five to ten year bear market has started. Such examples are in Mexico, Chile, Argentina, and so on. All these countries opened up their borders at that time allowing western and Japanese companies to enter and sell products to the native population. Their stock markets eventually collapsed to less than 10% of the peak in constant dollar terms. Their currencies collapsed 75%.

If history is any guide, Sensex will move below 2,000 in Rupees term and below 500 in US Dollar terms from its current value of 16,700.

That can seem devastating. But that is exactly what happened when developing countries had their worst incapable Governments in power.

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