During FY04, the Sensex had been successful in outperforming major global benchmark indices such as the Hang Seng, NASDAQ, Nikkei and the Dow.

This was on the back of a robust performance from India Inc riding the benefits of a low interest rate regime, increased demand (due to normal monsoons) and increased outsourcing.

However, a lot has changed since the turn of the last fiscal and FY05 has been a different story as far as the comparative performance goes. To put things in perspective, Rs 100 invested as on April 1 2004 would have turned out to be Rs 87 as on August 27. The below mentioned chart indicates the same.

Reasons for underperformance

• Change at the helm: The 'shock' defeat of the incumbent NDA government resulted in the largest fall ever witnessed by the Sensex in a single day. The NDA government was known for its so-called reformist measures and the change brought about at the helm, which saw the Leftists in the government, led to pessimism resulting in selling activity. This led to the downfall, after which the Sensex has almost failed to recover.

• Crude oil shock: The over $15 per barrel rise in crude oil prices and India's over-dependence on imports has put the country in a vulnerable position. To put things in perspective, the Indian crude oil mix averaged nearly $29 per barrel in FY04, while it touched $44 recently. During 1QFY05, the newly elected government continued with the previous government's policy - not to hike petro-product prices. This resulted in corporate performance being affected.

• Rising interest rates: During the period, interest rates in the global markets changed. For instance, the US Fed increased short-term rates by 25 basis points each, two times in quick succession. While on the other hand, interest rates in India continue to remain unchanged. For a developing economy, it is given that to attract foreign capital, interest rates have to be reasonably higher, as the risks faced by a developing economy are higher than that in a developed economy. Since that did not happen, India witnessed some flight of foreign capital, thus leading to added pressure on the equity markets.

• Inflation: Last but not the least, rise in global commodity (like steel and aluminium) prices coupled with crude oil prices have led to robust inflation in the economy. As last reported, inflation has crept to 7.96% in August. Inflation has many negative impacts on the economy. For instance, many projects, which had earlier seemed attractive, might turn out to give negative real returns as a result of higher inflation.

Taking these factors into account, recently, the Centre for Monitoring Indian Economy (CMIE) has downgraded India's GDP growth to 6% from 6.5% to 7% for FY05.

However, we believe that with global crude prices now softening and the government taking steps to curb inflation (duty cuts), the Indian growth story still has some steam left in it and in the long term, prudence shall prevail.

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