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.

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.