Thoughts on recent economic and political events

Re: Rupee. For now, since policy action materialised (just when I had given up on it !!!!) Rupee will be strong. As long as Euro strengthens against dollar (maybe one month or so MAX) Rupee should be around 54 levels.

If even more policy action (more than the CRR cut) materializes and govt survives the next month without rupture - then Rupee can max reach 53 levels.

Gold will rise in dollars and so despite the rise in Rupee, Gold will be stabe/rise.

When Rupee will weaken again will depend on

1. US election results (too close to call) - I expect Obama close win - which is bad for the US economy and Indian economy - Rupee will fall, Indian stocks steady, Gold will rise. But if Romney surprises and wins, I expect good response in Indian stocks and Rupee up, gold steady.

2. How much diesel price rise cuts Indian demand - I expect probably nil - which is good for economy i.e good growth but with high inflation. Rupee will fall, Gold will rise.

3. How high Brent oil goes (125-130 levels or 150 levels) - 130 is tolerable with Rupee depreciation to 60 levels. Stocks will rise, Gold will rise. 150 means Indian recession with Rupee in free fall - stocks will be down, gold will rise a lot.

At some point, Rupee will start a down march again after the initial euphoria dies down. Gold will re-perform when that happens.

But for Punjabi's prediction of 44000, economy will have to be in shambles. 35000 is safe and good. Gold at >40,000 means bad news and a worthless currency.

But a lot depends on how active MMS gets. Right now he has demonstrated 2 things:

1. The opposition to reforms was REALLY STRONG. Hence the reason for not doing it - it is endangering his govt, just like nuclear deal. The events more or less excuse MMS for not acting earlier - he really didnt have an option.

2. He has planned ahead and must have tied up with DMK, Laloo and BSP in advance to save his govt. Just like BJP MPs had been bought up in advance for the nuclear deal vote - I am sure there are many turn coats in many parties which have already sold their parlimentary votes.

Both points bail out MMS. He wasnt a bad guy after all - he had no option.

His assessments and timings make him probably the most wily and astute politician active in India today. And he has used these abilities for the nation's good. If his govt survives - my hat is off. He would have done an encore performance to the nuclear deal if he survives and also cuts Mamta and Mulayam to size.

MMS is not the person whose "I am a good guy" persona was misleading us - the real MMS is real fox.

Maximising returns, minimising risk, planning in advance, catching adversaries off guard - he has achieved them all.

Now if we get some good follow up action on liberalization of licences - we are looking at some short term pain for long term gain.

I would sell equities into the current rally when Sense-x crosses 20,000 - but keep SIPs running and buy into any corrections which might materialise after the run up gets over (probably around Nov).

I agree with Wiseman's assessment that current QE cannot solve problems and imbalances in US and Europe.

US might however innovate and restructure their workforce out of the problems - so Ben has done the right thing.

While Draghi has probably done the wrong thing - it is probably better for Europe to take a hit on Bank balance sheets right away and kick out Southern Europe out of the Euro - single currency in the face of political disunity and differences in productivities is not sustainable. Better to let Greece, Italy and SPain depreciate out of the situation. That is the short term solution.

But long term solution is a political union. Again, more possible between Germany and northern European countries than old enemies like Italy, Greece and even France (though France should ideally make common cause with Germany).

I expect political vacuum in middle east as US retreats - Euro has to take over the reigns. Better if UK, France and Germany join a political force to maintain oil supplies and other similar problems - they have similar productivity and interests and should ideally join up with the help of smaller north European countries.

The run up to new year is going to be interesting - as newer chess pieces start moving on the board. And the totally fluid situation conjures up a new picture within a short while.