Economic Roundup, December 06, 2019

Economic Environment

  • India growth forecast
  • Consumer confidence

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

India’s real GDP forecast for 2019-20 is being downgraded uniformly to 5%. Further, consumer confidence in India dropped to its lowest since at least 2014. The key point to note is that India’s monetary policy is unable to be effective to jump start growth because (a) inflation is edging up and the Reserve Bank of India (RBI) cannot cut rates risking higher inflation and potential stagflation; and (b) uncertainty in monetary policy transmission because of the drag of non-performing assets and the economic environment in general that are restraining banks from lending. This makes the performance of the stock market indices suspect because the underlying economy is not holding up. Corporate performance when quarterly earnings results would begin to be released in January may give an indication of real economic performance.

What to expect from the markets next week?

Selling pressure will remain on the financial markets especially given the economic situation. Still, despite slowing growth, on a relative basis, India continues to be the destination for foreign institutional investors as it is remains among the world’s fastest growing major economies.

Economic Roundup, October 25, 2019

Economic Environment

  • Banking reforms for restarting growth

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

The Fitch rating agency has downgraded India’s growth in Fiscal Year 2020 to 5.5% while the International Monetary Fund (IMF) sees it at 7%. A mixed signal for the financial markets. India’s problem, besides tight fiscal policy, is a crisis in the banking sector. The Modi government must:

1. Restructure the banking sector through mergers to reduce the Non-Performing Assets (NPA) as a percentage of all assets.

2. Provide liquidity to the restructured banks.

3. Reform the lending process to ensure checks and balances for the NPA problem not to recur.

Then monetary policy will be effective to jump start growth and also boost the financial markets.

What to expect from the markets next week?

Selling pressure will remain on the financial markets especially given the global economic situation. Still, despite slowing growth, on a relative basis, India continues to be the destination for foreign institutional investors as it is remains among the world’s fastest growing major economies.

Economic Roundup, October 18, 2019

Economic Environment

  • Global growth slowdown

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

The slowdown of economic growth in India is becoming a cause of concern for the financial markets though foreign exchange reserves are at an all time high. Economic policy in India is being hampered by tight fiscal policy because of the fear that budget deficit could increase above target. Such a fear is misplaced. To grow, India must borrow to build infrastructure (road and rail both between and within cities, air, electricity, and telecommunications) and sanitation (water, and waste disposal) which will increase domestic investment, hence lower unemployment and raise consumption – a consistent boost to the financial markets. Without the goal, plan and execution to build infrastructure and sanitation as in advanced countries by 2050, India will remain a developing country with the largest population in the world-a nightmare scenario.

India has the one of the largest domestic markets in the world today, second only to China, and it needs to be developed by opening the country to the leading multinationals in all sectors on the condition that they make everything in India from nuts and bolts to airplanes, hiring Indian labor for the Indian market. This will propel India to catch up with advanced countries and China in a decade because technology will flow into the country.

What to expect from the markets next week?

Selling pressure will remain on the financial markets especially given the global economic situation. Still, despite slowing growth, on a relative basis, India continues to be the destination for foreign institutional investors as it is remains among the world’s fastest growing major economies.

Economic Roundup, September 20, 2019

Economic Environment

  • Corporate tax cut

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

The financial markets rose for the week following the finance minister’s announcement of a 5% corporate tax cut. This tax expenditure could increase the budget deficit unless it helps trigger economic recovery and accelerates growth to raise the tax revenue.

On the global front, both the US Federal Reserve and the European Central Bank cut interest rates to support economic growth in the United States and to revive the economy in Europe. This is a boost to the markets on the one hand and on the other hand it confirms market worries about future economic growth.

What to expect from the markets next week?

Selling pressure will remain on the financial markets especially given the situation in Saudi Arabia and the US trade war with China. Still, despite slowing growth, on a relative basis, India continues to be the destination for foreign institutional investors as it is remains the world’s fastest growing major economy.

Economic Roundup, September 13, 2019

Economic Environment

  • Index of Industrial Production (IIP) and  inflation
  • Oil price

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

IIP has grown but at a slower rate indicating slowdown in the manufacturing sector. Inflation is lower than the Reserve Bank of India target of 4%. But developments over the weekend in Saudi Arabia suggest that until the issue of attacks on Saudi oil facilities is resolved, global oil prices could see a spike and any upside price persistence could transmit to inflation and pressure on India’s foreign exchange reserves further pressuring an economy already under stress. The uptick in the Indian financial markets because of efforts by the central government to restore growth could be short lived.

What to expect from the markets next week?

Selling pressure will be persistent on the financial markets especially given the situation in Saudi Arabia. Still, despite slowing growth, on a relative basis, India continues to be the destination for foreign institutional investors as it is remains the world’s fastest growing major economy.

Economic Roundup, September 06, 2019

Economic Environment

  • Growth
  • Reserve Bank of India (RBI) monetary policy

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

India’s gross domestic product growth is slowing further, in pace with economic slowdown around the world. RBI policy is expected to stay on the path of easing on October 4th, when the Monetary Policy Committee (MPC) meets next, along the lines of monetary expansion by major global central banks. Though fiscal expansion will cut into the government’s target for budget deficit, it may be necessary to boost the economy. Selling pressure will continue to build on the financial markets.

What to expect from the markets next week?

Selling pressure will remain on the financial markets. Still, despite slowing growth, on a relative basis, India is the destination for foreign institutional investors. Any news from the central government on fiscal easing could boost the markets.

Economic Environment

  • Index of Industrial Production (IIP)
  • Reserve Bank of India (RBI) monetary policy
  • Consumer confidence

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

The IIP has slowed in June confirming the slowdown of the Indian economy. The RBI cut the repo rate by an unconventional 35 basis points perhaps with the expectation that a surprise rate cut which is not a multiple of 25 basis points can stimulate the economy (the markets expected either a 25 basis point cut or a 50 basis point cut). Consumer confidence is also down and the purpose of the RBI rate cut was two-fold: encourage consumer borrowing and private investment. It is unclear how effectively lower interest rates from the RBI can be passed on to consumer and corporate borrowers and increase bank lending given the bad loan crisis the banks are facing. The financial markets reacted ambivalently to the RBI rate cut, still down from their all time highs.

What to expect from the markets next week?

Financial markets will continue to react to the remaining corporate earnings reports for the April-June quarter which are weak and any new information on China, Iran and the global economic front.

Economic Roundup, August 2, 2019

Economic Environment

  • US Federal Reserve Rate Cut

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

The US Federal Reserve, as we expected, cut its benchmark federal funds rate by 25 basis points and put off normalization of its balance sheet until September to ease monetary policy in response to the global slowdown. US economy also slowed down but from a higher than potential growth rate to the rate of expansion before the Trump administration’s fiscal easing. The global slowdown, including in India, is causing the oil price to fall.  While corporate earnings in the US are doing well, they are not doing so well in India. Forecasts of Indian growth have also been lowered for fiscal year 2019-2020.  The budget has been a disappointment from the standpoint of fiscal easing and the Indian equity markets have fallen as a result.     

What to expect from the markets next week?

The Reserve Bank of India (RBI) will cut the repo rate again this month by 25 basis points on August 07, 2019 in line with the other major global central banks given the muted inflation. Unless the Indian financial sector is reformed, it is unclear how effective rate cuts can be to stimulate economic growth. Financial markets will continue to react to corporate earnings and any new Information on China, Iran and the global economic front. Despite the Fed rate cut which has a tendency to weaken the US dollar, on balance, the Indian rupee will hover around the status quo vis-a-vis the dollar because of the slowdown of the Indian economy. Foreigners, on net, because of slowdown in Europe, inability of the Japanese economy to recover robustly, and trade tensions with China, will maintain their portfolio investments in the Indian economy which, albeit slowing, is still growing at a healthy pace.     

Economic Roundup, July 19, 2019

‎Economic Environment

  • Iran situation

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

The geopolitical tensions in the Strait of Hormuz, as we had expected would happen for quite some time, are ratcheting up the oil price. However, the slowing global economy is putting a lid on oil demand and we do not expect concerns in India about fuel prices and any attendant inflation until oil rises secularly and hits $80/barrel. At the moment, slowing Indian GDP can become a concern especially for foreign portfolio investors and if they continue to take money out of equities it could pressure the markets.

What to expect from the markets next week?

Corporate earnings results and global economic conditions will determine whether the Reserve Bank of India (RBI) will cut the repo rate again in August. A July rate cut by the US Federal Reserve could set off a rate cut by the RBI in India. Financial markets will react to corporate earnings and any new Information on China, Iran and the global economic front.

Economic Roundup, July 12, 2019

Economic Environment

  • Industrial Production, Consumer Confidence, Inflation

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

India’s industrial production,compared to a year ago, slipped, consumer confidence is lower, and inflation – albeit below Reserve Bank of India (RBI) target – is edging higher closer to the 4% target (the mid-point of the 2-6% inflation targeting range). While these indicators suggest that the RBI could lower the repo rate in August, it brings into doubt how much room the RBI has to cut before it returns to worrying about inflation. Moreover, the effectiveness of RBI rate cuts is also in doubt given the reluctance of the banking sector to lend and to transmit down the rate cuts amidst the bad loans crisis. These circumstances place the 7% growth forecast for the Indian economy in fiscal 2019-20 in doubt especially amidst global slowdown. It must be noted here that the Indian financial markets are taking cue from the signals from global central banks to cut interest rates to ward off the slowdown and are still up.

What to expect from the markets next week?

Corporate earnings results and global economic conditions will determine whether the Reserve Bank of India (RBI) will cut the repo rate again in August. A July rate cut by the US Federal Reserve could set off a rate cut by the RBI in India. Financial markets will react to corporate earnings and any new Information on China, Iran and the global economic front.