Economic Roundup, January 18, 2019

Economic Environment

  • Interim budget and macroeconomic indicators

How are the Indian and global economic environments affecting the financial markets?

  • Government of India is scheduled to present the interim budget in this election year on February 01 for the parliament’s approval. The government appears to be keen on expansionary fiscal policy before the general election which is making many observors doubt the government’s commitment to a fiscal deficit target of 3.3 percent of GDP in the year 2018-19. It is also expecting to persuade the Reserve Bank of India (RBI) to transfer an interim dividend of Rs 30,000-40,000 crore to the government by March. All of this is to be able to raise consumer spending and create jobs which have become a drag on the economy. That being said, domestic politics aside, Indian economy is doing well, projected to grow in the range of 7.2 – 7.5 percent in 2018-19 and 2019-20 despite the slowdown in the rest of the global economy. India’s trade balance is less negative and consumer price index (CPI) inflation on a year-on-year basis is low at 2.19 percent in December 2018, far less than what the RBI has to worry about, closer to the lower end of the RBI inflation targeting range of 2-6 percent. Therefore, unless growth forecasts are seriously wrong or inflation rises to be of concern to policy makers at the RBI, the Indian financial markets – other than reacting to developments abroad – can be expected to depend on corporate fundamentals.

What to expect from the markets next week?

Continued range-bound and flat behavior can be expected in the coming week. It must be noted that corporate earnings reports will continue to determine whether the major Indian indices will recover from being close to correction territory last week.

Economic Roundup, January 11, 2019

Economic Environment

  • Global growth and corporate earnings

How are the Indian and global economic environments affecting the financial markets?

  • The markets continue to focus on global growth and corporate earnings. As the 2018 Fourth Quarter corporate earnings releases begin, US earnings are thus far not encouraging potentially signaling a slowdown but there are still many companies that are yet to report. Indian economy, however, has strong fundamentals while the rest of the world economy appears to potentially experience a slowdown in 2019 including the US economy though the United States may not enter a recession. Global economic concerns and political risk in relation to the upcoming parliamentary general elections in India in 2019 will continue to affect the Indian financial markets through the first two quarters of calendar year 2019.

    What to expect from the markets next week?

Continued range-bound and flat behavior can be expected in the coming week. It must be noted that beginning next week corporate earnings reports could determine whether the major Indian indices will formally enter correction territory because both BSE SENSEX and NSE NIFTY 50 are already hovering close to 10 percent decline from their 52-week highs. Tata Consultancy Services (TCS) has reported solid growth in the last quarter of the 2018 calendar year but it is yet to be seen if this is an anomaly or a trend in the technology sector and in earnings as a whole for all the reporting companies. If it is a trend, it is encouraging for the Indian economy because it could bring the major stock indices out of being close to correction territory and also portend solid gross domestic product (GDP) growth.

Economic Roundup, January 04, 2019

Economic Environment

  • Global growth and corporate earnings

How are the Indian and global economic environments affecting the financial markets?

  • Indian financial markets have been skittish taking cues from volatility in the US markets due to political risk and uncertainty about the upcoming 2018 Fourth Quarter corporate earnings releases beginning January. Indian economy, however, has strong fundamentals while the rest of the world economy appears to potentially experience a slowdown in 2019 including the US economy though the United States may not enter a recession. Global economic concerns and political risk in relation to the upcoming parliamentary general elections in India in 2019 will continue to affect the Indian financial markets through the first two quarters of calendar year 2019.

    What to expect from the markets next week?

Indian financial markets will continue to takes cues from global markets on global growth though they may not be as volatile as the US and other major global financial markets. Range-bound and flat behavior can be expected in the coming week. It must be noted that beginning next week corporate earnings reports could determine whether the major Indian indices will formally enter correction territory because both BSE SENSEX and NSE NIFTY 50 are already hovering close to 10 percent decline from their 52-week highs.

Economic Roundup, December 28, 2018

Economic Environment

  • India’s fiscal deficit

  • US economy

How are the Indian and global economic environments affecting the financial markets?

  • India’s fiscal deficit in the time period of April-November 2018 is already 115% of target. Subdued tax receipts lagely contributed to bloating the fiscal deficit. This is a macroeconomic drag on the Indian economy and, though there is little to be concerned at the moment, it could lead to higher interest rates and further depreciation of the rupee in the long run depending on how much the cumulative government debt is because ideally the total cumulative government debt should be around 60% of the country’s gross domestic product (GDP). The country has done a good job bringing down this number to manageable levels in the past 10 years as can be seen from the chart below.

    • The ongoing government shutdown in the US, the uncertainty resulting from president Trump’s comments about the Fed and its chairman, and the reaction of the US financial markets to Treasury Secretary Steven Mnuchin reaching out to major bank CEOs about their liquidity situation and ability to provide credit to the economy has led to considerable volatility on Wall Street. This could lead to volatility in the major advanced and emerging financial markets around the world given the uncertainty about the global economy in 2019.

      What to expect from the markets next week?

    Indian financial markets will continue to takes cues from global markets on global growth though they may not be as volatile as the US and other major global financial markets. There is continuing pressure on the oil price because of oversupply concerns due to expectation of global economic downturn despite agreement to cut output by 1.2 million barrels per day between the Organization of the Petroluem Exporting Countries (OPEC) and Russia. For India, the falling oil price balances any downward pressure on the economy and rupee from expectations of slowing global growth.

Economic Roundup, December 21, 2018

Economic Environment

  • US monetary policy

  • Government infusion of funds into public sector banks (PSBs)

How are the Indian and global economic environments affecting the financial markets?

  • The US Federal Reserve, just as we expected, despite pressure from the markets not to raise the federal funds rate, has raised the rate to the range of 2.25 – 2.5% while slowing down the number of expected rate increases in 2019 to 2. This gives the Fed time to take stock of the US and global economies perhaps until June 2019 before deciding on interest rate policy again while being mindful of whether the interest rate is at neutral – the interest rate at which economic growth is neither supported nor restrained – with inflation hovering near the Fed’s target of 2 percent year-on-year rise in core (meaning excluding the volatile food and energy costs) personal consumption expenditures (PCE). The US financial markets which fell interpreted the Fed’s December 19, 2018 decision to raise the interest rate by 25 basis points while slowing rate increases in 2019 as being dovish, reinforcing their bearish sentiments about US and global growth. For India, as with other emerging markets, interest rate increases by the Fed coupled with apprehensions about slowdown in global growth pressure the financial markets because of dollar flight back to US and fear of domestic economic slowdown.

  • Indian government’s decision to infuse funds into PSBs to ease credit crunch in the system and the Reserve Bank of India’s (RBI’s) decision to ease liquidity in the financial sector will boost PSB and NBFC stocks.

    What to expect from the markets next week?

Indian financial markets will continue to takes cues from global markets on global growth though little else can be expected in terms of news before the end of the year to have any major impact on them. Continuing decline in the oil price because of oversupply concerns due to expectation of global economic downturn despite agreement to cut output by 1.2 million barrels per day between the Organization of the Petroluem Exporting Countries (OPEC) and Russia. For India, the falling oil price balances any downward pressure on the economy and rupee from US Fed rate increases and slowing global growth.

Economic Roundup, December 14, 2018

Economic Environment

  • New Reserve Bank of India (RBI) Governor

  • Elections in 5 states

  • US-China trade tensions and global growth

How are the Indian and global economic environments affecting the financial markets?

  • The government has quickly appointed Shaktikanta Das as Urjit Patel’s replacement after his sudden resignation. Signals of business continuity at the RBI from the new governor have prevented market anxiety. Given that annual inflation in November is well below RBI inflation target and October industrial production has surged, RBI policy is expected to be status quo on interest rates.

  • In the run up to the general election in 2019, 5 states have gone to the polls on December 07. The results announced on December 11, despite the loss in all 5 states of the ruling BJP, have not led to any unusual volatility in the markets which have, in fact, welcomed the winners’ promises to deal with youth unemployment and farmer sentiments as a sign of support for the economy.

  • The primary concern for the markets has been uncertainty about US-China trade which they have linked to the slowing global growth. The global markets, with India taking cues from their reaction to developments in the US-China trade situation, want a resolution to the trade tensions to alleviate their concern about any possible global economic slowdown. However, it is unlikely to be resolved within the next 90 days unless China meets US demands on bilateral trade. The global markets, as a result, will remain somewhat volatile through the end of the first quarter of 2019.

    What to expect from the markets next week?

Indian financial markets will continue to takes cues from global markets on global growth though they could breathe a sigh of relief because of expected slower pace of Fed rate increases due to probable slowing of US growth at around the Fed’s inflation target and the RBI status quo, despite a new governor, but with a watchful eye on Indian economic growth outlook also at around the RBI’s inflation target.

Economic Roundup, December 07, 2018

Economic Environment

  • Reserve Bank of India (RBI) monetary policy

  • US-China trade uncertainty

  • The Organization of the Petroleum Exporting Countries (OPEC) and Russia

  • Global growth

How are the Indian and global economic environments affecting the financial markets?

  • The RBI left interest rates unchanged given the slowdown of the Indian economy in the July-September quarter and lower than target inflation while maintaining its stance of ‘calibrated tightening’. This decision by the RBI was widely expected though the markets also expected a change in the RBI’s stance to ‘neutral’. The reaction of the Indian equity markets was bearish because of the RBI signal that it is not bullish on the economy. Some deterioration in the macro situation was also reported by the government with the Indian fiscal deficit exceeding the fiscal year target with the year still one quarter away from being completed. It must be noted here that the trade deficit is also increasing and is highly sensitive to the oil price. The twin fiscal and trade deficits do not bode well for the strength of the rupee. If inflation holds at or below target, we expect the RBI to return to ‘neutral’ stance with a bias of lowering interest rates next year depending on economic growth to boost the economy though we also expect the RBI not to act on lowering interest rates because of inflation concerns until Indian gross domestic product (GDP) growth rate falls to about 6.5% in 2019. Therefore, given the forecast of 7.2% for GDP growth rate in 2019, we expect, on balance, the RBI to maintain status quo on interest rates through the end of the fiscal year 2018-2019.

  • Indian equity market reaction to US-China trade uncertainty was mixed despite a sharp fall in US markets. It is still unclear how the US-China trade dispute would be resolved while noting that India, in fact, stands to benefit from both US and China should their trade dispute continue.

  • OPEC and Russia agreed on Friday to together cut oil production by 1.2 million barrels-per-day for the next 6 months to prop up the oil price. It is unclear to what extent they would succeed in doing so given rising US production which will only stand to benefit from propped up oil prices. This, however, is not good news for India because higher oil prices will only cause the trade deficit to rise and pressure the rupee.

  • Concerns about global growth have caused all the major advanced and emerging equity markets to fall. The International Monetary Fund (IMF) has clarified that it only expects global growth to slowdown without the risk of a recession.

    What to expect from the markets next week?

Indian financial markets will continue to takes cues from global markets on global growth though they could breathe a sigh of relief because of expected slower pace of Fed rate increases because of probable slowing of US growth at around the Fed’s inflation target and the RBI status quo but with concern about Indian economic growth outlook also at around the RBI’s inflation target.

Economic Roundup, November 30, 2018

Economic Environment

  • US Federal Reserve policy expectations

How are the Indian and global economic environments affecting the financial markets?

  • US central bank – the Federal Reserve – has responded to the changing market conditions through speeches by senior Fed officials including the Fed chairman. The fear that gripped the markets about possible acceleration or overshooting of US interest rates beyond the neutral Federal Funds rate amidst worries about global growth due to the trade war between the US and China has subsided after Fed statements that implied that future rate hikes could be at a slower pace through 2020. The Fed thinks that the current interest rate is just below neutral which neither encourges or discourages growth with inflation at target. It is possible that there may not be too many hikes left before the Fed halts its rake hike cycle. Also, to consider is the reduction of the Fed’s balance sheet by selling government bonds and mortgage securities which could raise bond yields and mortgage rates. That said, the Fed’s outlook on rates with any revisions to be published after its December meeting is good for emerging markets such as India: slower pace of rise in US interest rates makes India attractive for foreign institutional investment (FII) and could reduce the amount of dollars FIIs repatriate from India. This will ease the pressure on the rupee especially given the falling oil price.

    What to expect from the markets next week?

Indian financial markets could breathe a sigh of relief because of expected slower pace of Fed rate increases and, therefore, the bias could be to the upside. The markets could have more direction in December after (1) the meeting of the Organization of the Petroleum Exporting Countries (OPEC), (2) Reserve Bank of India’s (RBI) bi-monthly monetary policy committee (MPC) meeting and possible change in RBI policies to address financial sector issues, and (3) FOMC meeting about US interest rates and get away from range-bound, flat, and drifting behaviors of the past couple of weeks.

Economic Roundup, November 23, 2018

Economic Environment

  • US economy and global growth concerns

How are the Indian and global economic environments affecting the financial markets?

  • The primary concerns of the Indian financial markets at the moment are (1) the possible slowdown of the US economy against the backdrop of continued gradual increase in US interest rates by the Federal Reserve sticking to the Fed’s earlier projections and the fading US fiscal stimulus and (2) the impact of the trade conflict between US and China on Chinese, German and Japanese economies leading to a global slowdown of economic growth as projected by both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). Unless the US Fed revises its macroeconomic projections at the final meeting of the Federal Open Market Committee (FOMC) in December, uncertainty is building about the future path of interest rates in the US given slowing US and global growth because, in the worst case scenario, there could be a US and/or global recession by 2020 due to trade conflicts and US interest rates. Despite strong domestic economic growth and the benefits of the falling oil price, Indian financial markets are reacting negatively to these concerns about the rest of the global economy, taking cues from financial markets in US, Europe and Japan and, therefore, on net, their behavior is mixed.

    What to expect from the markets next week?

Indian financial markets will continue to be mixed next week just as they have been this week, digesting the mixed signals from – on the one hand – India’s strong growth, low inflation, the falling oil price and improving current account deficit (CAD) and – on the other hand – the prospect of rising interest rates in the US and the repatriation of US dollars by foreign portfolio investors (FPIs), slowing global growth, and the fragile health of the domestic banking and finance sector. The markets could have more direction in December after (1) the meeting of the Organization of the Petroleum Exporting Countries (OPEC), (2) Reserve Bank of India’s (RBI) bi-monthly monetary policy committee (MPC) meeting and possible change in RBI policies to address financial sector issues, and (3) FOMC meeting about US interest rates and get away from range-bound, flat, and drifting behaviors of the past couple of weeks.

Economic Roundup, November 16, 2018

Economic Environment

  • October CPI inflation

  • Oil price

  • US dollar

How are the Indian and global economic environments affecting the financial markets?

  • Owing to falling food prices, in October 2018 year-on-year consumer price index (CPI) inflation has dropped to 3.31%, to a level below the Reserve Bank of India’s (RBI) medium term target of 4%. This gives the RBI some time to consider raising interest rates again and most likely the central bank will not raise rates at its next bi-monthly monetary policy committee (MPC) meeting on December 05, 2018. It must be noted, however, that low food prices could pressure the government by having to face frustrated farmers before the next general election in 2019 and by the need for perhaps higher than anticipated minimum support prices (MSP) which could strain the government budget and potentially raise the fiscal deficit threatening the deficit target of 3.3 per cent of GDP in 2018-19.

  • Inflation in India, the rupee, and the macro picture overall are being helped by the steeply falling oil price due to anticipated over-supply in the global market despite, on November 05, 2018, US reimposition of Iran sanctions, which are offset, at least temporarily, by 180-day waivers granted by US to eight countries, including India, to continue procuring oil from Iran. Saudi Arabia is considering a supply cut in December 2018 to hold up the oil price given the surging US shale oil production. The Organization of the Petroleum Exporting Countries (OPEC) and Russia are still discussing, without an agreement yet, if supply should indeed be cut to prevent another oil price collapse due to what could become oversupply, especially given the US oil production surge, if global economic growth slows down weakening demand for oil. US oil production and global economic growth rate hold the key to the oil price looking forward.

  • The US dollar is getting stronger due to a strong economy and the prospect of rising interest rates at home, political uncertainty in Europe over Brexit and Italian decision to end fiscal austerity, and slowing growth in China. This implies headwinds for the Indian rupee countering the tailwinds of the falling oil price and the consequently improving current account deficit (CAD) – leaving the rupee in a mixed situation.

    What to expect from the markets next week?

Indian financial markets will be mixed next week just as they have been this week, digesting the mixed signals from – on the one hand – India’s strong growth, low inflation, the falling oil price and improving CAD and – on the other hand – the strengthening US dollar, the prospect of rising interest rates in the US and the repatriation of US dollars by foreign portfolio investors (FPIs), and the fragile health of the domestic banking and finance sector.