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, 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.

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 22, 2019

Economic Environment

  • Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) flows

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

  • Amid net outflows of FII in the last 12 months and slowing of FDI, there could be pressure building up on India’s foreign exchange reserves and the rupee especially should India’s trade deficit widen in the coming months. Other than this risk, the rest of India’s macroeconomic indicators – primarily growth, inflation, interest rates, and the exchange rate vis-a-vis the US dollar and other major currencies – are relatively stable.

What to expect from the markets next week?

While US trade talks with China, the US-North Korea summit, and domestic US politics could impact the US markets next week, their affect on the Indian markets may not be that significant. Indian financial markets could be range-bound and perhaps even flat as there are no major economic indicators expected next week.

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 25, 2019

Economic Environment

  • Reserve Bank of India (RBI) policy in February

  • Global economic growth

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

  • The 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 raising the possibility that the RBI could return its stance to neutral at the February 07, 2019 meeting of the monetary policy committee (MPC) and perhaps could lower the repo rate later in 2019, giving a boost to the financial markets. The Indian financial markets – other than reacting to developments abroad – can be expected to continue to depend on corporate fundamentals given that the macro situation is stable for now.

  • China’s growth slowdown to around 6.5 percent appears to be more on a permanent basis and this could benefit India, particularly, amidst US trade war with China, if “Make in India” picks up. The International Monetary Fund (IMF) has warned of slowdown of global growth in 2019 and 2020 and this has pressured the global financial markets. The affect of global growth on India and local financial markets will depend on the extent to which it will affect India’s exports and the stock prices of export-oriented companies.

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.

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.