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A surprise rate cut is too little too late…

The Reserve Bank of India’s rate cut today sparked a rally in the Indian equity markets that quickly lost steam as the session continued. The rate cut indicates that newly installed governor Duvvuri Subbarao is focused on preventing a further growth slowdown, rather than staving off inflationary pressures. Although the recent WPI figures have shown signs of a slowing trajectory and commodity prices have collapsed, inflation is in double digit territory year-over-year and further declines in the rupee, caused by this rate cut, will only increase inflation.

In addtion, Prime Minister Manmohan Singh is laying the ground work for increased public spending in an attempt to maintain favorable public opinion in the face of deteriorating economic circumstances. Supported by leftists in parliament he intends to launch $49 Billion in additional rural work programs and subsidies. In our view, this proprosed dramatic expanding of government programs can only have a negative impact on the Indian economy, longer term.

We continue to have a short bias on India’s stock market and will re-short the India Fund (IFN) if it reaches our immediate term target of $23.65. This assumes that we will be able to short Indian stocks. The Indian media is reporting that regulators there are examining the practice of short selling of Indian securities by foreign investors and have asked all FIIs to disclose their stock loan practices.

Ah – there’s nothing quite like a socialist bureaucracy, is there!

Andrew Barber