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.

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