EDITOR'S BLOG ( 16TH July;2011)

REAL TEST IS ON HOME GROUNDS

Euro zone's peripheral concerns are taking centre stage on the global markets' radar. While Greece is on the boil, a number of Spanish and Italian banks have failed the second round of EU stress tests are weighing on Europe's risky assets and the Euro. And elsewhere, the sentiments are turning precautious with worries of how will portfolio flows turn if the crisis worsens. Even the credit agencies are planning to downgrade US too.

But back home, Euro zone crisis or not, foreign institutional investors, or FIIs, will buy India if the house is in order. And beyond the ongoing concerns on governance and accountability, inflation and interest rates have taken the center stage. And with the results season kicking in, concerns loom over the earning prospects of India Inc.

The wholesale prices index, which was over 9 per cent in May, has mounted up further in the June - thanks to the recent fuel price hike. On the macro side, forecasts on GDP growth, for 2011-12, to get curtailed within 8 per cent are making rounds. And likelihood of the Reserve Bank of India hiking interest rates for eleventh time since March 2010 is gaining stronger ground. Hope against hope is that the RBI would soften its stand.

The only silver lining in recent days is further runaway in global commodity prices - especially oil. But that could be a temporary relief for corporate. Their earnings will still take beating of higher interest costs.

And on fund flows, while there is a school of thought that smart money will find its way in alternate markets, debt flows will still find India attractive owing to the higher interest rates. The 8 per cent which a 10-year government securities offers today is attractive for a foreign investor who would make a 5 per cent gain after adjusting 3 per cent inflation in his economy.

Of the net FII inflows of $5.75 billion, as on July 12, $2.18 billion have come into equity while $3.57 billion have gone into debt. The picture at the same time in 2010 was different. Then, out of $ 15.42 billion which came in until July 12, $7.98 billion came into equity while debt saw $7.44 billion being pumped in.

Back to Euro zone; the woes there will have their dents on the global sentiments, but the real tests that India has to pass through are all at home.