A Time to Be Careful

The markets are going to keep moving upwards. It's a time to be optimistic, but also one to be careful
A wave of optimism is sweeping across markets. The reason, of course, is that a few days ago, RBI governor Dr Raghuram Rajan has lowered the policy rate by 0.25 per cent. With this, a turning point has been reached in Rajan's battle against inflation. By reducing interest rates earlier than when most expected, Rajan has clearly indicated that he believes inflation to be on its way to being tamed. Couldn't it equally be said that while inflation is still a problem, the lack of growth is now a bigger problem?
For some years now, the economic discourse in India has focused too much on interest rates. So much so that for an investor who is learning about economics from news articles (as most do), interest rates might appear to be the be all and end all of factors that drive growth. Part of the blame goes to the previous finance minister, P. Chidambaram, who often tried to lay the blame for declining growth at the RBI's door by pointing at high rates. It was a story that too many people swallowed and started thinking of interest cost as the sole driver of business performance and economic growth.
 A similar virtuous cycle will come into being for equity investments. However, herein lies the problem. While everyone's happy that equities are going to be making gains that are long overdue, we should take a more circumspect view. Unfortunately, past experience has shown that in phases like this-when markets are obviously headed up-investors make poor-quality investments. The incoming tide raises all boats and it's hard to see which ones will keep floating and which ones will eventually sink.
It's a time to be excited, sure. We are all excited about India's future. But it's also a time to invest carefully in quality stocks for the long term.