| Inflation at historic low of 0.44% | | | | in demand even if the economy slows down. |
| Economy staring at deflation. Is it a good news? | | | | Investors also need to identify those companies |
| While a fall in prices may sound like good news to | | | | where decline in prices lead to increase demand for |
| most laymen, economists see this as an ominous sign | | | | their products, prompting them to produce more |
| of a collapse in demand in the economy. | | | | value-added products with greater economies of |
| The country is facing a negative inflation or deflation | | | | scale. In this category, companies operating in sectors |
| scenario with inflation touching near-zero level of | | | | like FMCG, snacks and beverages, health care, utilities |
| 0.44% and expected to go down further in coming | | | | and telecommunications can be included. |
| weeks. If negative inflation sustains for longer period | | | | Checkout: Best FMCG Companies - Stocks to Invest |
| of time, it will affect economic activities and in turn | | | | in 2009 |
| performance of most of the companies. | | | | Companies with strong balance sheets, which do not |
| In the current scenario, prices are falling not because | | | | have much debt on their books, can also be |
| of improved productivity but because of fall in | | | | considered for investment. As debt servicing would |
| demand. If deflation sustains for longer period of | | | | become difficult in the deflationary time, one should |
| time, it will have a more adverse impact on demand. | | | | stick to companies (mainly in IT, health care and |
| "Deflation results in less demand, lower production | | | | energy sectors), which are less leveraged, the report |
| and weak economic growth," said Citibank in a report | | | | added. |
| "India Macroscope''. | | | | The report pointed out that total investment in the |
| A negative inflation discourages investments in the | | | | economy may decline by 2 percentage points of GDP |
| economy. The real interest rate difference between | | | | by 2010 to 35.7% from 37.1% in the current financial |
| nominal interest rate and inflation becomes very high, | | | | year. |
| making funds costlier. As demand goes down, | | | | At the same time, companies operating in capital |
| capacity utilization of manufacturing units declines. | | | | goods sector should be avoided. Capital goods are |
| This discourages investment in capacity expansion. | | | | required when companies are investing in either new |
| As performances of companies will be hit, the | | | | projects or expanding existing facilities. But, as |
| Citibank report said investors should be selective | | | | companies are avoiding both, the performance of |
| while buying stocks in deflationary environment. It | | | | capital goods companies may further dip. |
| said invest in those companies whose products or | | | | The real estate companies should also be avoided. In |
| services are not much affected by fall in demand. So, | | | | deflation, the general perception is that the prices will |
| companies operating in health care, telecommunication | | | | further fall. So, home buyers will further postpone |
| and utilities like electricity distribution could be good | | | | their purchasing decisions, which will further increase |
| bet to invest. Services of these companies will remain | | | | the suffering of the cash-starved real estate sector. |