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.

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