'Week of carnage in the financial markets'

From the time the US congress passed the much maligned budget deficit agreement and the rating agency Standard and Poor's in effect de-rated the US government, world financial markets have been in turmoil.

France seems to be the next country facing a risk of de-rating. The de-rating in effect makes funds more expensive. The Federal Reserve of the US made a commitment to maintain low interest rates for the next 24 months to stimulate a stagnant economy. The problem faced by the US and the other developed countries is of a slowing economy and resultant unemployment.

In developing countries like India and China, the situation is the opposite. China announced higher than feared inflation for the month of July. India has been through several rounds of interest rate hikes to counter high inflation. Both these emerging economies are sacrificing growth to counter inflation. The global economy is dealing with two issues – need for growth in the west and need to curb inflation in the east. And the stock markets of both worlds are taking a beating due to this.

'Wall street/Dalal street carnage provides a window into politics'

Unemployment is expected to be the critical factor in the next US presidential elections. The ugly fight to extend the budget deficit has had broad ramifications. Though the US avoided default, the credit rating S&P de-rate their economy and Wall Street has lurched through a terrible August. The Federal Reserve and Ben Bernanke have responded by committing to a low-interest regime for the next 24 months, leading right up to the elections. The hope in the US is that the economy will pick up through cheap access to funding and an increase in confidence. The US Presidential Election results may well depend on this.

Dalal Street and BSE may have caught a cold when the US sneezed, but India has fundamental economic issues on the demand side unlike the US. Demand has pushed inflation to politically unmanageable levels in India and the government is compromising the growth story to tame this election fulcrum.The Central Bank has increased interest rates several times now and more increases can be expected. Higher funding cost will slow the Indian growth story but may save an election is the thought process of the government.

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