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.

Economic Roundup, July 05, 2019

Economic Environment

  • Budget

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

The salient implication of the budget is the need for the development of a bond market in India to fund road, rail, water, power, and gas infrastructure through public-private partnerships. Agriculture should continue to remain in focus because nearly 50% of workers are employed in the sector and climate change requires particular attention to the sector as a critical part of India’s economic development.

The budget gave mixed signals to the financial markets: for the financial year 2019-20, on the one hand, there is an expectation of 7% growth and on the other, a lower fiscal deficit target of 3.3% which may not be achievable. The markets reacted accordingly closing out mixed for the week.

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. Financial markets will react to corporate earnings, macroeconomic data on industrial production and inflation, and any new Information on China, Iran and the global economic front.

Economic Roundup, June 28, 2019

Economic Environment

  • External debt, current account deficit and fiscal deficit
  • Global economic slowdown

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

Three key macroeconomic indicators – total external debt, current account deficit and fiscal deficit – are not boding well for India. They are all high, putting India deeper in the red. This, combined with foreign money raising stock market valuations to highs and lingering troubles in the banking sector, should corporate earnings next month not demonstrate a heathy business sector, could show divergence between market valuations of corporations and real economic performance putting downward pressure on the financial markets and potentially could lead to a downward spiral of the markets and the economy.

The global economy is showing signs of slowing including in the United States which could lead the Reserve Bank of India (RBI) to further lower the repo rate at its next meeting in August. Should tensions in the Middle East flare up, any persistent rise in the oil price could put the RBI in a tight spot not giving the central bank much room to cut given the upward pressure on inflation by oil though the RBI has less to be concerned at the moment about inflation. Should the Middle East be stable, the global economic slowdown could, in fact, put downward pressure on the oil price to avert which the major oil exporting countries including Russia seem to be agreeing on extending production cuts to prop up the oil price.

What to expect from the markets next week?

Foreign Institutional Investment (FII) is continuing to push the financial markets up.

Economic Roundup, June 07, 2019

Economic Environment

  • Consumer Confidence and Future Expectations
  • Reserve Bank of India (RBI) policy

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

  • The jobs situation in the country appears to be impacting confidence and future expectations of consumers. Both indices have turned downward. This has been a chronic issue and should be dealt with by the government. All eyes, therefore, would be on the government budget.

  • The RBI has cut the benchmark repo rate by 25 basis points to 5.75 percent from 6 percent. Given the situation with the banking sector, the easing effect of the RBI would be in doubt if banks do not lend by lowering the borrowing rates of investors and consumers. It is a wait and see situation on the policy front.

The jobs situation and economic expectations have not appeared to negatively affect the financial markets yet. RBI rate cut may have actually boosted the market sentiment as both the benchmark indices – Sensex and Nifty – are in record territory.

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 potentially leading to a financial crisis. Of note would be US-China trade tensions which could, in fact, favor capital flows into India given the risks to the Chinese economy from US tariffs and any other situations that could arise in the Chinese financial markets and the economy.

Economic Roundup, May 31, 2019

Economic Environment

  • Growth, Foreign Institutional Investment (FII), and Imports

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

  • As we feared all along, India’s prime minister Modi’s second term has begun on a difficult note for the Indian economy. India’s growth has decreased to 5.8% in the first quarter (January – March 2019) of the year, slower than China’s and thereby losing its status as the world’s fastest growing major economy. This combined with slowing exports will pressure the foreign reserves position of India this year. India, at the moment, has about 8 months of dollar reserves to pay for its imports compared to China’s of about 18 months. The government, in its first budget from the new finance minister, and the Reserve Bank of India (RBI) at its next meeting on June 06 given that inflation is at the lower end of the RBI’s inflation targeting range, should send strong signals that they are supporting growth without which the trend of slowing growth could continue taking the wind out of the financial markets. We will know more in the first week of July when corporations begin releasing their April-June 2019 quarterly earnings. 

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 potentially leading to a financial crisis. 

Economic Roundup, May 24, 2019

Economic Environment

  • Election results

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

Elections gave a resounding victory to prime minister Modi, surprisingly a bigger win than in 2014 amid farmer distress, youth unemployment, high income inequality, a stressed and corrupt financial system inherited from his Congress predecessor’s years, and the promise of a basic income for 50 million of the country’s poorest families by the Congress. This shows the lack of leadership depth in Indian politics, a big political risk, as the people flocked to Modi and picked the devil they know no matter the promises of the discredited Sonia and Rahul Gandhi’s Congress in the 2014 election. Looking at the glass half full, Modi’s economic performance since 2014 has certainly been better than that of his Congress predecessor and it has been anything but anemic. The markets have cheered Modi’s victory and it can only be hoped that the economic issues outlined here get addressed and an agenda for not merely the next 5 years but the next 30 can be put into place if India, a democracy, is to develop as well as China, an authoritarian regime, has done in the past 30. Modi sees himself, after all, as a prime minister dedicated to India’s development.

What to expect from the markets next week?

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 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.