Economic Roundup, May 17, 2019

Economic Environment

  • Exit polls
  • Oil price, Exports and Trade Deficit

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

Exit polls across the board, though doubtful in their accuracy, predict a second term for the incumbent NDA government. This should be encouraging for the markets because of expectations of continuity of reforms and market-friendly policies.

Oil price is firming up because of the tense US-Iran standoff. This is pressuring India’s trade deficit especially when exports are uncertain to grow due to the tentative global economy.

What to expect from the markets next week?

The financial markets will closely follow the election results due on May 23rd and the US-China and US-Iran situations. Foreign Institutional Investment (FII) is continuing to push the markets up. Should oil price rise, it would put pressure on the rupee.

Economic Roundup, May 10, 2019

Economic Environment

  • Manufacturing
  • US-China Trade War
  • Iran and Oil Price

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

As an indication that the Indian economy is slowing, India’s industrial production contracted by 0.1 per cent in March, the lowest in 21 months due to a slowdown in manufacturing.

As a knock-on effect of the US-China trade war, India may be expecting some parts of the global US supply chain to move to the country but that may not be so. India will have to rely on the domestic market because of changes in the structure of the world economy to increasingly locate the supply chain on home territory by the substitution of labor with automation. On-shoring by automation is reversing off-shoring because production costs due to technology substituting for labor are at least the same or lower. Increased automation will be a trend in India also, putting pressure on the domestic labor market whether the products or services produced are for domestic or foreign markets. The current times, politically and economically, are not the same for India as when China had become the manufacturing hub of the world. On the bright side, India should require foreign multinationals to establish manufacturing centers in the country, closer to the Indian market if they wish to access it, and reduce India’s imports.

The prospect of broader geopolitical tensions in the Middle East because of rising US-Iran tensions could push the oil price slightly higher. India along with Europe and other Asian countries where demand for oil is rising due to growing economies should work toward bypassing US sanctions on Iran and work geopolitically to ease the US-Iran situation.

Financial markets are stable and range-bound though they are sensitive to international developments on the front of US-China trade war and US-Iran tensions.

What to expect from the markets next week?

The financial markets will closely follow the US-China and US-Iran situations. Should oil price rise, it would put pressure on the rupee.

Economic Roundup, May 03, 2019

Economic Environment

  • Slowdown in the fourth quarter (Q4) of fiscal year (FY) 2019

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

  • Data from Q4 of FY 2019 showing economic slowdown due to lower aggregate demand, investment and exports validates the stance of the Reserve Bank of India (RBI) that growth needs to be supported. As we have discussed earlier, the dovish leanings of global central banks are holding up the global economy and the financial markets. It appears that beginning in the United States and other developed economies, due to automation, the world economy is seeing a gradual structural transition to less labor intensive economies, though at the present time it is being reflected as higher worker productivity. As this trend takes hold, it could pose greater challenges to populous countries such as China and India over the next decades given the large size of their workforce and especially India, given its younger labor pool. Creating jobs to form a stable middle class – an impotant election issue in India – would not become less but more of a challenge as years go by. India needs to pay particular attention to not let growth slowdown no matter who is at the helm in politics by committing to long term infrastructure (road, rail, computing and communications, and energy) investment – a creator of jobs and a better economic climate with knock on effects in all three economic sectors: agriculture, manufacturing and services – as China has done consistently over the last three decades. This is a Hobson’s Choice for India if the country is to do well in the future.

What to expect from the markets next week?

The financial markets could continue to maintain their upward momentum just as they also are in the United States. Foreign institutional investment (FII) could continue to flow into India because of the interest rate differential with the advanced economies.

Economic Roundup, April 26, 2019

Economic Environment

  • US economy and India economy

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

  • US economy has performed well above expectations in the first quarter of 2019. As we have said earlier, this can largely be attributed to Federal Reserve continuing to signal (as also expected next week) that it will pause on any further rate increases because of slowdown in the rest of the world economy. Also, the Federal Reserve has slowed down its process of balance sheet normalization so that it does not adversely impact liquidity in the financial markets. Major global central banks given the favorable inflation environment, across the board have sent dovish signals, with India, in fact, cutting the repo rate twice. Such preemptive actions should hold up India’s economy and the global economy without risk of a recession during the rest of the year. Europe and Japan, as we have discussed in the previous edition of the Economic Roundup, have demographic issues constraining growth despite accommodative monetary policy though it is not something to be imminently concerned about. India, however, must work expediently on banking sector weakness independent of the elections to prevent any slowdown from taking hold because of poor monetary policy transmission, for economic slowdown could trigger hot money outflows as we also discussed earlier. Geopolitics, at least for now, appear to be under control so as not to adversely affect the oil price which, if it sharply rises because of US tensions with Iran, could significantly impact the rupee and India’s economic outlook.

What to expect from the markets next week?

The financial markets could continue to maintain their upward momentum if foreign institutional investment (FII) continues to flow into India though this also poses a risk should the economy slowdown because of the rising probability of the reversal of hot money flows which would pressure the current account deficit (CAD), potentially leading to a financial crisis. The true state of the economy would come into greater relief as corporations continue to report earnings.

Economic Roundup, April 19, 2019

Economic Environment

  • Jet Airways, oil price and global economic slowdown

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

  • Banks’ exposure to Jet Airways shutting down operations and the firming of the oil price have pressured the Indian financial markets and the rupee because of potential impact on monetary policy transmission for raising domestic investment and on the current account deficit. The markets are on a high, so any bad news is triggering profit booking and forcing the markets down. Slowdown in Europe and Japan is also souring the market sentiment but the ineffectiveness of monetary policy in Europe and Japan may largely be due to near zero population growth rate and could be chronic though it should not be of concern for Europe and Japan. This should not affect the prognosis for the Indian economy which has a burgeoning, young population and an expanding domestic Indian market which could potentially offset any pressure on exports. India should look to offset dependence on foreign oil and gas by investing domestically in ways to find domestic energy alternatives to foreign oil and gas beginning now and into the long term to alleviate pressure on inflation and the current account deficit.

What to expect from the markets next week?

The financial markets could continue to maintain their upward momentum if foreign institutional investment (FII) continues to flow into India though this also poses a risk should the economy slowdown because of the rising probability of the reversal of hot money flows which would pressure the current account deficit (CAD), potentially leading to a financial crisis. The true state of the economy would come to relief as corporations continue to report earnings.

Economic Roundup, April 12, 2019

Economic Environment

  • March Consumer Price Index (CPI) Inflation and February Index of Industrial Production (IIP)

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

  • The March CPI is low at 2.86% but the February IIP came in very low at 0.1%. Low inflation is conducive to monetary policy expansion, however, as we analyzed in the two previous editions of the Economic Roundup, the Reserve Bank of India (RBI), while lowering the repo rate by 25 basis points to 6%, has emphazised the monetary policy transmission mechanism for accommodative monetary policy to be able to effectively invigorate the economy by spurring investment. It is unclear at the moment, given the upcoming elections, whether banking sector reform can continue to remove impediments to investment. Further, it is also unclear if fiscal expansion is possible before the 2nd Quarter of fiscal 2019-20 due to the elections. The RBI Governor is optimistic about the future of India’s economic growth and this optimism will only attract more hot money while keeping interest rates at current levels. Though this might help the RBI not to lower interest rates further or obviate the need for any fiscal expansion, government should keep a close watch on it without settling for its short term benefit to India’s foreign exchange reserves and the stock markets.

What to expect from the markets next week?

The financial markets could continue to maintain their upward momentum if foreign institutional investment (FII) continues to flow into India though this also poses a risk should the economy slowdown because of the rising probability of the reversal of hot money flows which would pressure the current account deficit (CAD), potentially leading to a financial crisis. The true state of the economy would come to relief as corporations continue to report earnings.

Economic Roundup, April 05, 2019

Economic Environment

  • Reserve Bank of India (RBI) policy

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

  • As we analyzed in the previous Economic Roundup, the RBI, while lowering the repo rate by 25 basis points to 6%, has emphazised the monetary policy transmission mechanism for accomodative monetary policy to be able to effectively invigorate the economy by spurring investment. All our prior analyses continue to hold. It is unclear at the moment, given the upcoming elections, whether banking sector reform can continue to remove impediments to investment. Further, it is also unclear if fiscal expansion is possible before the 2nd Quarter of fiscal 2019-20. All of this even as hot money continues to flow into the country.

What to expect from the markets next week?

The financial markets could continue to maintain their upward momentum if foreign institutional investment (FII) continues to flow into India though this also poses a risk should the economy slowdown because of the rising probability of the reversal of hot money flows which would pressure the current account deficit (CAD), potentially leading to a financial crisis. Many economists concur that the current data on economic growth may not be accurately reflecting the state of the economy. Policy flying blind because of data quality issues could catch the RBI and the government behind the curve on both policy and reform amidst the distraction of the election. More would be known as corporations continue to report earnings.

Economic Roundup, March 29, 2019

Economic Environment

  • Index of Industrial Production (IIP)

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

  • While the financial markets are buoyant because of foreign portfolio and institutional investment, Indian economy appears to be slowing along with the rest of the global economy as indicated by the depressed January IIP reading. Also agriculture, which constitutes a majority of the rural population, has been under duress for sometime and this state of affairs seems to be continuing. The slowing global economy appears to be impacting Indian exports and the state of the banking sector has still not relaxed the credit constraints which are impeding the transmission of lower interest rates into the economy. Election results in May 2019 could be a mixed bag because it is unlikely that the incumbent government could secure a majority in the parliament similar to the election in 2014 which could further add to the pressures on the economy though continuity of reforms is much needed to improve the banking and jobs situation in the country. Cleaning up the banking sector to enable investment to create jobs and increasing reliance on the vast domestic market vis-a-vis dependence on exports should hold up the economy and continue to keep macro indicators stable.

What to expect from the markets next week?

The financial markets could continue to maintain their upward momentum if FII continues to flow into India though this also poses a risk should the economy slowdown because of the rising probability of the reversal of hot money flows which would pressure the current account deficit (CAD), potentially leading to a financial crisis. More would be known beginning next week as corporations begin to report earnings.

Economic Roundup, March 22, 2019

Economic Environment

  • US Federal Reserve policy

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

  • Global financial markets, including India’s, fearing a global economic slowdown have dropped in the aftermath of the US Federal Reserve’s signals at its most recent meeting to hold interest rate increases and slow down its process of balance sheet normalization. This appears to be a reaction rather than a considered move on the part of the markets because ex ante central bank support worldwide in response to the slowing global economy should, in fact, be encouraging: the economic policymakers do not intend the world economy to slip into a recession especially after all the hard work since the financial crisis and the Great Recession. The Reserve Bank of India (RBI) policy is in sync with the rest of the major central banks. Signals such as the yield curve inversion in the United States do not signal an imminent recession but only the probability that, if monetary and fiscal policies stay status quo, a recession could happen in 12-24 months from the date of inversion. The global central banks are ahead of the curve and accommodative monetary and fiscal policies could transmit into the economy averting a recession.

What to expect from the markets next week?

The fact that the major central banks of the world are now all supporting growth in 2019, the Indian financial markets will look to corporate performance in the last quarter of fiscal 2018-19 when earnings reports begin to be released in April, getting over their initial knee jerk negative reaction last week to the global central banks’ acknowledgment that the world economy is slowing. Indian financial markets could continue to be beneficiaries of Foreign Portfolio and Institutional Investments given the relatively low interest rate environment in US, Europe and Japan.

Economic Roundup, March 15, 2019

Economic Environment

  • India macro indicators

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

  • India’s macro indicators such as trade deficit and inflation in February were indicative of a stable macro environment. The trade deficit narrowed due to growth in exports and lower imports of oil, gold and electronics. The lower imports, however, could imply a weakening economy as seen by low growth in industrial production in January. Inflation was higher in February than in January but continues to stay well below than the Reserve Bank of India’s (RBI) medium term inflation target of 4 percent. It is likely that the RBI, at its next meeting in April, the first in the new 2019-20 fiscal year, could lower the benchmark repo rate by another 25 basis points to support growth while maintaining a neutral monetary policy stance.

What to expect from the markets next week?

Indian financial markets, once the affects of foreign portfolio investment (FPI) inflows wane, could be range-bound and perhaps even flat given slowing growth. The fact that the major central banks of the world are now all supporting growth in 2019, the financial markets will look to corporate performance in the last quarter of fiscal 2018-19 when earnings reports begin to be released in April.