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 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 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.