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.

Economic Roundup, November 02, 2018

Economic Environment

  • Concerns about liquidity crunch in India

  • Reserve Bank of India (RBI) v. Finance ministry public spat

  • External political-economic environment

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

  • The Confederation of Indian Industry (CII) is concerned that the non-banking financial companies (NBFCs) crisis is causing a liquidity crunch which could pressure economic growth and that the RBI has to step in to ensure liquidity in the markets. It is more than likely that the RBI will not raise rates on December 05, 2018 after its next bi-monthly monetary policy committe meeting. It has already comforted the markets on liquidity by proposing to buy government bonds which has buoyed the financial markets.

  • The public spat between India’s central government and the RBI about purportedly RBI’s lax regulation during the period 2008-14 which led to the build up of non-performing assets (NPAs) and about the RBI allegedly not being proactive to prevent the spread of the NBFC crisis which could affect growth has not affected the financial markets adversely thus far. The central government’s remarks that RBI’s independence is essential despite the public spat about the central government’s role in directing RBI (a rarity that has not come to pass in modern India’s history) has, in fact, boosted the financial markets.

  • Trade tensions between US and China are clearly leading to a slowdown of the Chinese economy and broadly affecting China’s trading partners in Asia. India, however, is benefiting from the US-China trade spat because China is lowering or, in some instances, removing tariffs on its imports from India and also the possibility of greater US-India trade is increasing especially because US economic growth continues to be strong and US inflation is at the Fed’s target compelling the Fed to stick to gradual interest rate increases or perhaps even slowdown the pace of rate increases which would help ease the repatriation of dollars to the US by foreign portfolio investors (FPIs). Slowing global growth could lower the oil price given that the supply of oil by Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries is not expected to be curtailed to make up for the loss of Iranian oil from the world markets after US reimposes sanctions on Iran beginning November 04, 2018. US is also granting waivers from sanctions on a case-by-case basis to its allies which are importers of Iranian oil. Therefore, fears of further oil price hikes have abated and this has reduced the pressure on the Indian financial markets and on the Indian rupee vis-a-vis the US dollar.

    What to expect from the markets next week?

The Indian financial markets will continue to react to global growth concerns, oil price, rupee, global cues on interest rates, stabilization of NBFCs, and earnings reports. This year, thus far, as we have predicted, given the domestic macro and sectoral situation and external environment, the Indian markets have sharply corrected down. We expect this downward pressure to remain especially given the NBFC situation. Despite the equity market indices experiencing a correction, India’s economic growth is as forecast and inflation is under wraps which could prevent the equity market indices from descending into bear territory unless earnings reports are disappointing.

Economic Roundup, October 26, 2018

Economic Environment

  • Worldwide bear market coming?

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

  • The signs of a looming bear market around the world as can be seen from the (Reuters) charts below are increasingly becoming ominous, though US still remains the best performing market despite the NASDAQ index entering correction territory on October 24, 2018. Global trade (US v. China) and geopolitical (US v. Iran and US and West v. Saudi Arabia) tensions which have made the oil price volatile with Brent and WTI crude first rising and then falling over global growth concerns and promises by Saudi Arabia to make up for the loss of Iranian oil from November after US sanctions on Iran once again kick-in, rising US interest rates and the public complaints by Trump against the US Federal Reserve over them, and the effect of rising US interest rates on emerging markets are all weighing on the minds of financial market participants.

What to expect from the markets next week?

The Indian financial markets will continue to react to global growth concerns first voiced at the International Monetary Fund (IMF) – World Bank meetings by the IMF in Bali, oil price, rupee, global cues on interest rates, and stabilization of the non-bank financial companies (NBFCs). This year, thus far, as we have predicted, given the domestic macro and sectoral situation and external environment, the Indian markets have sharply corrected down. We expect this downward pressure to remain especially given the external environment. If corporate earnings for the July-September quarter are strong, they could act to offset the downward pressure on the markets to some extent, otherwise, there is a risk that Indian financial market indices could enter bear territory if they fall more than 20% from their 52-week highs having already fallen about 14%.

Economic Roundup, October 19, 2018

Economic Environment

  • Inflation as measured by the consumer price index (CPI) and expected Reserve Bank of India (RBI) policy

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

  • India’s inflation as measured by the CPI has risen at an annual rate of 3.77 percent in September 2018 as compared to 3.69 percent in August 2018. Inflation continues to be below the RBI’s medium term inflation target of 4% with some softening of core (excluding food and fuel) inflation as well. Before the next (fifth) bi-monthly monetary policy statement of the RBI on December 5th, inflation reading for October 2018 would be released on November 12th. Also, India’s gross domestic product (GDP) data for the July-September quarter would be released on November 30th providing insight into economic growth. The RBI, consistent with its monetary policy stance of “calibrated tightening”, depending on the November reading of CPI inflation, may or may not raise the repo rate. If the October CPI inflation reading is benign as was also the case with August and September, with the rest of the macro variables such as current account deficit (CAD) and the rupee stabilizing, the RBI could choose not to tighten monetary policy because inflation continues to be below the lower end of its inflation forecast range of 3.9-4.5 percent in the second half of 2018-2019. To watch would be the budget deficit which could be inflationary by putting the government’s budget deficit target in jeopardy because of larger minimum support outlay by the government due to low food prices.

What to expect from the markets next week?

The markets will continue to react to the oil price, rupee, global cues on interest rates, and stabilization of the non-bank financial companies (NBFCs). This year, thus far, as we have predicted, given the domestic macro and sectoral situation and external environment, the Indian markets have sharply corrected down. We expect this downward pressure to remain especially given the outlook on energy prices (political situation with Iran and Saudi Arabia) and potential inflationary affects of higher energy costs. Strong corporate earnings for the July-September quarter could act to offset the downward pressure on the markets to some extent.

Economic Roundup, October 12, 2018

Economic Environment

  • Rising US interest rates; shaky Indian Non-Banking Financial Companies (NBFCs)

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

  • This week has been a double whammy for the Indian financial markets. First, amid the rising global oil prices, a hawkish US Fed has triggered fears in the financial markets that US interest rates could possibly rise more aggressively than expected, leading to outflow of dollars from emerging markets such as China and India prompting warnings from the International Monetary Fund (IMF) about risks to global financial stability and growth. Fed fears have raised global bond yields and prompted a steep sell off in the equity and foreign exchange markets in emerging economies, especially in India where, together with the fall in equity markets, the rupee has fallen about 14% relative to the US dollar this year. Besides the rising US dollar which has softened a bit after rate fears, currency markets are preferring currencies such as the euro and yen because of trade surpluses in Germany and Japan. Fed fears becoming a reality will depend on the core personal consumption expenditures rate of inflation (PCE without the volatile food and fuel components) – the Fed’s preferred inflation measure – and its outlook. It is more than likely that, economic conditions remaining as expected, the Fed, notwithstanding US president Trump’s expression of displeasure with Fed policy, will stick to its published gradual interest rate increase path through 2020 because the current stance of the Fed on interest rates is that the Federal Funds Rate (FFR) is neither accommodative nor neutral. The gradual rate of increase in interest rates, keeping in mind both growth and inflation, will ensure that the Fed will not overshoot the neutral rate, inadvertently slowing down the US economy or causing a recession. The Fed may have to reassure the markets that it continues to remain on the gradual interest rate increase path. Second, the domestic NBFC situation and pressure on the Indian banking sector which the regulators are working on is pushing the markets down. The Reserve Bank of India (RBI) should continue to act based on CPI inflation vis-a-vis its inflation target of 4% in the medium-term even if it means slowing the Indian economy a bit to contain inflation.

What to expect from the markets next week?

The markets will continue to react to the oil price, rupee, global cues on interest rates, and stabilization of the NBFCs. This year, thus far, as we have predicted, given the domestic macro and sectoral situation and external environment, the Indian markets have sharply corrected down. We expect this downward pressure to remain especially given the outlook on energy prices and inflation. To watch are the corporate earnings for the July-September quarter and their affect on the markets.

Hedgeloop Performance Summary for a Sample Client Portfolio from 01/01/2018 to 10/10/2018

As can be seen from the above table, we mostly advised SELL since the beginning of the year and the market moved down steeply, correcting twice by falling about 10% from the 52-week high – once early in the year and now. Given the data, we never expected a secular bull market trend. The markets were looking for triggers to correct down because they were expensive based on fundamentals and technicals and given the negative macro and external pressures. Fears of inflation, interest rate rises, oil price rise, rupee depreciation, US-China trade war, US-Iran geopolitical isssues and their implication for the oil price, and possibility of contagion due to the NBFC crisis in India have provided those triggers. Our predominantly SELL advice from our artificial intelligence models, based entirely on the mathematical models of the data, has been consistent with fundamentals, technical, sentiment, domestic Indian regulatory and macro, and external factors driving the market, generating a cumulative P&L for the portfolio of 118%.

Special Note – RBI Policy, October 05, 2018

Reserve Bank of India (RBI) monetary policy outlook

The RBI will release its Fourth Bi-Monthly Monetary Policy Statement for the year 2018-19 on October 5th. It is being widely expected that the RBI will increase the repo rate by 25 basis points given the falling rupee and the rising price of oil. The mandate of the RBI is inflation stabilization – as measured by the consumer price index – at its medium-term target of 4%. Annual inflation in August 2018 was 3.69%, below RBI’s target. The balance between on the one hand the continued strength of the Indian economy and on the other macro and banking and financial services sector concerns will determine the interest rate outlook. The looming US sanctions on Iran in November and the reluctance of Russia and the Organization of the Petroleum Exporting Countries (OPEC) to raise output could tighten global oil supplies putting further upward pressure on the oil price which is expected to be around USD 90/barrel. This has the potential to put brakes on India’s gross domestic product (GDP) growth rate due to higher energy costs, raise inflation if higher energy costs persist, and raise the current account deficit (CAD) because of at least status quo imports assuming, despite the cheaper rupee, exports will be unable to offset the higher cost of imports. Higher import prices will also pass through into inflation. Slower growth could reduce tax revenues thereby raising the budget deficit. Further, on the budget deficit front, budget numbers for 2018-19 were calculated on the basis of oil at USD 65/barrel and rupee at around 66 to the dollar. Those calculations no longer hold. Oil subsidies, budgeted at just under INR 25,000 crore for 2018-19, may end up 40% higher or more in actual expenditure. The rising dollar because of strong US economic growth is depreciating the rupee which is compounded by selling rupee to buy dollars to pay for imports. These factors and rising US interest rates are driving away foreign institutional investors (FIIs) who are, on net, taking dollars out of India, putting pressure on India’s foreign exchange reserves. At the present time, however, India’s macro situation, though experiencing negative pressures, continues to be stable. Higher interest rates in India is one way to attract FIIs but RBI may not be inclined to sap liquidity from the market by raising the repo rate amid talk already about lowering the reserve requirement and RBI bond purchases from banks to ensure that the markets are sufficiently liquid to prevent panic selling. As the non-banking financial companies’ (NBFC) regulator it will also need to address what steps it may take, if any, about possible defaults by companies in that space. A contagion involving NBFCs could drag the equity markets and the economy down with it. The RBI, while intervening in the foreign exchage market as necessary by selling dollars and buying the rupee could, however, hold off on raising interest rates for this meeting but with an eye on the affect of oil price and the macro situation on inflation outlook for future meetings rather than using higher interest rates to put a floor under the falling rupee.

Economic Roundup, September 28, 2018

Economic Environment

  • Non Banking Financial Companies (NBFCs) and imports

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

  • Adding to the continuing concerns about the oil price and trade war, Indian domestic problems with questions about the liquidity of NBFCs after Infrastructure Leasing & Financial Services (IL&FS) defaulted on payments on its bonds greatly concerned the markets with both SENSEX and NIFTY ending more than 6% down from their 52-week highs, the banking and financial services sector causing most of the fall that was punctuated by whipsawing of the indices. Related sectors such as Realty and Autos also fell due to concerns over liquidity amid worries about a market contagion that could lead to a steep fall in the indices to a 10% correction or a 20% bear market. Government assurances have thus far averted such possibilities and the markets have stabilized though their future behavior will depend on how the NBFC issues are resolved by the regulators.

    What to expect from the markets next week?

    As during this week, next week’s market behavior will be primarily determined by government efforts to deal with the weakness in NBFCs, oil price and imports. Tariffs are being levied by the government on 19 ‘non-essential’ imports to reduce the import bill and counter the slide of the rupee. Also being considered are strategies to increase exports. The US Federal Reserve continues to remain on the path of raising interest rates and this coupled with the NBFC issues and current account deficit (CAD) concerns is putting a dampener on inflow of foreign portfolio investments pressuring foreign exchange reserves. Domestic banking and financial services sector and external oil price and trade war concerns will continue to cloud the movement of the equity markets. Next week the Reserve Bank of India (RBI) will release its Fourth Bi-Monthly Monetary Policy Statement for the year 2018-19 on October 5th. The balance between on the one hand the continued strength of the Indian economy and on the other macro and banking and financial services sector concerns will determine the interest rate outlook. RBI may not be inclined to sap liquidity from the market by raising the repo rate amid talk already about lowering the reserve requirement and RBI bond purchases from banks to ensure that the markets are sufficiently liquid to prevent panic selling. As NBFC regulator it will also need to address what steps it may take, if any, about possible defaults by companies in that space.