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.

Economic Roundup, March 08, 2019

Economic Environment

  • Foreign Portfolio Investment (FPI) inflows into India

  • US 1st Quarter 2019 growth estimate and February 2019 jobs report

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

  • The services sector in India is performing strongly while growth is dampening in manufacturing and agriculture. The global economic environment has resulted in lower growth forecasts of the Indian economy in 2019 and 2020 because of slowing international trade. However, globally, on a relative basis, India continues to be the fastest growing major economy despite signs of slowing growth among the large economies including the United States in 2019. Efforts to support growth both by the Reserve Bank of India (RBI) and the incumbent government before the general elections in May 2019 are attracting FPI inflows leading to large buys across industry sectors, pushing up the equity market indices.

  • Within the context of Brexit, European growth and monetary policy, and US-China trade talks, US economic growth expectations in the 1st quarter of 2019 are significantly lower compared to the 4th quarter of 2018. This could be more because of the longest government shutdown in US history and the bottoming of unemployment and affects on growth of Trump tax cuts. After all, US may not be immune to growth slowdown which is being experienced around the world. The US Federal Reserve is taking a second look at its monetary policy stance under these conditions by signaling a slow down or even stopping monetary tightening.

What to expect from the markets next week?

Indian financial markets, once the affects of FPI inflows wane, could be range-bound and perhaps even flat.

Economic Roundup, March 01, 2019

Economic Environment

  • 2018-19 Third Quarter Gross Domestic Product (GDP) growth rate

  • External environment in March 2019

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

  • Indian growth rate in the 3rd quarter of 2018-19 compared to a year ago has come in at 6.6 percent, below median economist expectations. This slower growth has been attributed to liquidity issues and lackluster growth in the agriculture sector despite pre-election government spending. The financial markets, however, could be fickle affected by geopolitical tensions between India and Pakistan until elections in India even though they reacted positively to the temporary easing of the situation this week. Further, the markets are yet to build-in the slower GDP growth rate which is expected to slow further in 2019 reacting to the slowing trade as the rest of the global economy slows: global slowdown could hurt India’s manufacturing sector – hitting auto, engineering, textile and some other labour intensive sectors and also the export-intensive IT and pharma sectors, lowering exports. Oil price fall this week has benefited the rupee. With inflation low, the Reserve Bank of India (RBI) is on the right track on monetary policy. Should growth continue to be weak, it is likely RBI could further lower interest rates to support growth.

  • Brexit, European growth and monetary policy, US-China trade talks and China’s National People’s Congress (NPC) and US economic growth expectations in the 1st quarter of 2019 will affect global sentiment in March 2019.

What to expect from the markets next week?

Indian financial markets could be range-bound and perhaps even flat as the markets absorb the 3rd quarter GDP data and global sentiment.

Economic Roundup, February 15, 2019

This week’s economic roundup is essentially unchanged from our February 08, 2019 edition. A notable piece of data is that consumer price index (CPI) inflation is 2.05 percent in January 2019. It continues to stay close to the lower end of the Reserve Bank of India’s (RBI’s) inflation targeting range of 2 – 6 percent justifying RBI’s monetary policy stance to favor growth. Moreover, there continues to be macroeconomic stability on the front of India’s budget and trade deficits though the government must be wary of fiscal slippage (indicating higher fiscal deficit – the government’s fiscal deficit target for both 2018-19 and 2019-20 has increased 0.1 percent to 3.4 percent from 3.3 percent) and slowing global growth (indicative of possible reduction in India’s exports) even as India’s growth continues to remain on target looking into 2020. The financial markets will continue to be range-bound.

Economic Roundup, February 08, 2019

Economic Environment

  • Reserve Bank of India (RBI) monetary policy

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

  • The new RBI governor Shaktikanta Das, given the low consumer price index (CPI) inflation reading – closer to the RBI’s lower end of the 2 – 6 percent range – in December 2018, has declared victory on achieving price stability and reoriented monetary policy to be pro-growth by changing the policy stance to “neutral” (as we expected 2 weeks ago) and at the same time also cut the repo rate by 25 basis points to 6.25 percent while staying committed to the 4 percent medium-term inflation target. It assured the markets that it would ensure adequate liquidity through open market operations as needed. The RBI is also open to transferring some reserves to the government as determined by the RBI’s central board. RBI policy has thus resolved the issues the central bank had with the government before Urjit Patel stepped down as governor. Low inflation and macroeconomic stability have helped the cause of both the new governor and the government. The financial markets responded accordingly by moving into positive territory.

What to expect from the markets next week?

Corporate earnings reports will continue to determine the path of the major Indian indices next week amid international concerns about slowing global growth and continuing trade tensions between the US and China. Even as growth is projected to be lower around the world, the United States – India’s principal export market – is holding steady and will remain so especially because the US Federal Reserve has signaled a “patient” approach to future rate increases given the tenuous global situation particularly in Europe and China. Indian financial markets will respond to economic developments around the world only insofar as they affect India’s exports.

Economic Roundup, February 01, 2019

Economic Environment

  • US Federal Reserve policy

  • India 2019 interim budget

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

  • US Federal Reserve stated in its policy statement at the end of the Federal Open Market Committee (FOMC) meeting on January 30, 2019 that it will be “patient” in future monetary policy actions implicitly recognizing the possibility of a slowdown in the US economy primarily due to external factors in the global economy at large and “muted inflation pressures”. It has assured the markets that it has the tools necessary beyond interest rate policy to stimulate the US economy should it become necessary in the future. This has boosted financial markets which were concerned about slowing global growth in the face of rising US interest rates and the US trade war with China.

  • The Indian interim (not full fledged) budget in the election year is scheduled to be presented on February 01, 2019. Rural and jobs-related spending will be in focus, though the deficit as a percentage of gross domestic product (GDP) is expected to remain under control. The financial markets will be scouring for information that will affect the various sectors and so some volatility can be expected but the market reaction to the budget could be muted because it is only an interim budget before the general election in April – May 2019. The general election outcome will have a bigger impact on the Indian financial markets than this interim budget.

What to expect from the markets next week?

Continued range-bound and flat behavior can be expected in the coming week with some volatility due to the budget. 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.

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, 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.