This market fall is a good buying opportunity. Ready?

The Bombay Stock Exchange Sensex and the Nifty have fallen by over 6% from their peaks seen in April, while the 10-year benchmark government bond, the 7.80% 2021 bond, has lost 3.5% from its highs. The rupee has lost over 2% in over a month. Foreign institutional investors (FIIs), who were buyers of equity in March and April, have turned net sellers in May. FIIs bought $3.2 billion in equities in March and April and have sold $1.5 billion in May so far  (as of 16 May 2011). The fall in asset prices in May is largely due to worries that inflation will bring down growth as policy makers tighten  monetary and fiscal policy to tame inflationary expectations. [caption id=“attachment_11546” align=“alignright” width=“380” caption=“If investors buy at the current levels they will be rewarded handsomely in the long run.  AFP”]  [/caption] With inflation, as measured by the Wholesale Price Index (WPI), trending close to 9% , the RBI raised policy rates by 50 basis points — that’s 0.5% — on May 3. It has indicated that it will maintain a tight monetary policy stance to ward off rising inflationary pressures and has forecast GDP growth at 8% for the fiscal year 2011-12, against 8.6% for the fiscal year 2010-11. Rising inflationary expectations, coupled with higher policy rates and lower growth expectations, are prompting asset prices — stocks and real estate primarily — to trend down. Investors who can look farther ahead will be rewarded handsomely if they buy at current levels of equities, bonds and the currency. The reason is pretty straightforward. The economy becomes stronger if inflation is contained and the government’s finances improve. The RBI, by raising rates, is aiming to get  inflation down to more reasonable levels, at which pointit can then lower rates to boost demand. The government, by lowering its fiscal deficit, is giving itself room to manoeuvre its finances when needed. (The fiscal deficit is the gap between revenues and expenditure that needs to be bridged by borrowings. It is projected at 4.6% of GDP for 2011-12, against 5.1% of GDP for 2010-11 and 6.8% of GDP for 2009-10.) The corporate sector benefits by optimising resource allocation and improving productivity when faced with tight budgets. Consumer leverage goes down in such times and can only improve, going forward, when prices fall and borrowing costs come down. The economy itself is not in the doldrums. On the contrary, there is optimism in both the technology and finance sectors where staff strength is expected to increase by 15-30% across  sectors. Margin pressures are showing on corporate profits (fourth-quarter results indicate margin pressures of at least 200 to 250 bps) ,which is a sign that rising input costs are not being passed on fully to the consumer. Consumer resistance to higher prices, coupled with improved corporate sector productivity, is beneficial in containing inflation expectations. The global economy is not doing too badly either. The US is adding jobs (April payroll numbers showed 244,000 jobs were created) while China, despite its tightening (it has  raised rates twice and its bank reserve ratio five times this calendar year) is projected to grow at over 8% . Germany remains strong,  with unemployment rates at their lowest since 1992. There is optimism in the global economy despite concerns over   eurozone debt and China inflation. The immediate outlook for the economy may not be very bright, but if the economy can emerge stronger in the longer term, the outlook looks very bright down the line.