Economic Roundup, December 28, 2018

Economic Environment

  • India’s fiscal deficit

  • US economy

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

  • India’s fiscal deficit in the time period of April-November 2018 is already 115% of target. Subdued tax receipts lagely contributed to bloating the fiscal deficit. This is a macroeconomic drag on the Indian economy and, though there is little to be concerned at the moment, it could lead to higher interest rates and further depreciation of the rupee in the long run depending on how much the cumulative government debt is because ideally the total cumulative government debt should be around 60% of the country’s gross domestic product (GDP). The country has done a good job bringing down this number to manageable levels in the past 10 years as can be seen from the chart below.

    • The ongoing government shutdown in the US, the uncertainty resulting from president Trump’s comments about the Fed and its chairman, and the reaction of the US financial markets to Treasury Secretary Steven Mnuchin reaching out to major bank CEOs about their liquidity situation and ability to provide credit to the economy has led to considerable volatility on Wall Street. This could lead to volatility in the major advanced and emerging financial markets around the world given the uncertainty about the global economy in 2019.

      What to expect from the markets next week?

    Indian financial markets will continue to takes cues from global markets on global growth though they may not be as volatile as the US and other major global financial markets. There is continuing pressure on the oil price because of oversupply concerns due to expectation of global economic downturn despite agreement to cut output by 1.2 million barrels per day between the Organization of the Petroluem Exporting Countries (OPEC) and Russia. For India, the falling oil price balances any downward pressure on the economy and rupee from expectations of slowing global growth.

Economic Roundup, December 21, 2018

Economic Environment

  • US monetary policy

  • Government infusion of funds into public sector banks (PSBs)

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

  • The US Federal Reserve, just as we expected, despite pressure from the markets not to raise the federal funds rate, has raised the rate to the range of 2.25 – 2.5% while slowing down the number of expected rate increases in 2019 to 2. This gives the Fed time to take stock of the US and global economies perhaps until June 2019 before deciding on interest rate policy again while being mindful of whether the interest rate is at neutral – the interest rate at which economic growth is neither supported nor restrained – with inflation hovering near the Fed’s target of 2 percent year-on-year rise in core (meaning excluding the volatile food and energy costs) personal consumption expenditures (PCE). The US financial markets which fell interpreted the Fed’s December 19, 2018 decision to raise the interest rate by 25 basis points while slowing rate increases in 2019 as being dovish, reinforcing their bearish sentiments about US and global growth. For India, as with other emerging markets, interest rate increases by the Fed coupled with apprehensions about slowdown in global growth pressure the financial markets because of dollar flight back to US and fear of domestic economic slowdown.

  • Indian government’s decision to infuse funds into PSBs to ease credit crunch in the system and the Reserve Bank of India’s (RBI’s) decision to ease liquidity in the financial sector will boost PSB and NBFC stocks.

    What to expect from the markets next week?

Indian financial markets will continue to takes cues from global markets on global growth though little else can be expected in terms of news before the end of the year to have any major impact on them. Continuing decline in the oil price because of oversupply concerns due to expectation of global economic downturn despite agreement to cut output by 1.2 million barrels per day between the Organization of the Petroluem Exporting Countries (OPEC) and Russia. For India, the falling oil price balances any downward pressure on the economy and rupee from US Fed rate increases and slowing global growth.

Economic Roundup, December 14, 2018

Economic Environment

  • New Reserve Bank of India (RBI) Governor

  • Elections in 5 states

  • US-China trade tensions and global growth

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

  • The government has quickly appointed Shaktikanta Das as Urjit Patel’s replacement after his sudden resignation. Signals of business continuity at the RBI from the new governor have prevented market anxiety. Given that annual inflation in November is well below RBI inflation target and October industrial production has surged, RBI policy is expected to be status quo on interest rates.

  • In the run up to the general election in 2019, 5 states have gone to the polls on December 07. The results announced on December 11, despite the loss in all 5 states of the ruling BJP, have not led to any unusual volatility in the markets which have, in fact, welcomed the winners’ promises to deal with youth unemployment and farmer sentiments as a sign of support for the economy.

  • The primary concern for the markets has been uncertainty about US-China trade which they have linked to the slowing global growth. The global markets, with India taking cues from their reaction to developments in the US-China trade situation, want a resolution to the trade tensions to alleviate their concern about any possible global economic slowdown. However, it is unlikely to be resolved within the next 90 days unless China meets US demands on bilateral trade. The global markets, as a result, will remain somewhat volatile through the end of the first quarter of 2019.

    What to expect from the markets next week?

Indian financial markets will continue to takes cues from global markets on global growth though they could breathe a sigh of relief because of expected slower pace of Fed rate increases due to probable slowing of US growth at around the Fed’s inflation target and the RBI status quo, despite a new governor, but with a watchful eye on Indian economic growth outlook also at around the RBI’s inflation target.

Economic Roundup, December 07, 2018

Economic Environment

  • Reserve Bank of India (RBI) monetary policy

  • US-China trade uncertainty

  • The Organization of the Petroleum Exporting Countries (OPEC) and Russia

  • Global growth

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

  • The RBI left interest rates unchanged given the slowdown of the Indian economy in the July-September quarter and lower than target inflation while maintaining its stance of ‘calibrated tightening’. This decision by the RBI was widely expected though the markets also expected a change in the RBI’s stance to ‘neutral’. The reaction of the Indian equity markets was bearish because of the RBI signal that it is not bullish on the economy. Some deterioration in the macro situation was also reported by the government with the Indian fiscal deficit exceeding the fiscal year target with the year still one quarter away from being completed. It must be noted here that the trade deficit is also increasing and is highly sensitive to the oil price. The twin fiscal and trade deficits do not bode well for the strength of the rupee. If inflation holds at or below target, we expect the RBI to return to ‘neutral’ stance with a bias of lowering interest rates next year depending on economic growth to boost the economy though we also expect the RBI not to act on lowering interest rates because of inflation concerns until Indian gross domestic product (GDP) growth rate falls to about 6.5% in 2019. Therefore, given the forecast of 7.2% for GDP growth rate in 2019, we expect, on balance, the RBI to maintain status quo on interest rates through the end of the fiscal year 2018-2019.

  • Indian equity market reaction to US-China trade uncertainty was mixed despite a sharp fall in US markets. It is still unclear how the US-China trade dispute would be resolved while noting that India, in fact, stands to benefit from both US and China should their trade dispute continue.

  • OPEC and Russia agreed on Friday to together cut oil production by 1.2 million barrels-per-day for the next 6 months to prop up the oil price. It is unclear to what extent they would succeed in doing so given rising US production which will only stand to benefit from propped up oil prices. This, however, is not good news for India because higher oil prices will only cause the trade deficit to rise and pressure the rupee.

  • Concerns about global growth have caused all the major advanced and emerging equity markets to fall. The International Monetary Fund (IMF) has clarified that it only expects global growth to slowdown without the risk of a recession.

    What to expect from the markets next week?

Indian financial markets will continue to takes cues from global markets on global growth though they could breathe a sigh of relief because of expected slower pace of Fed rate increases because of probable slowing of US growth at around the Fed’s inflation target and the RBI status quo but with concern about Indian economic growth outlook also at around the RBI’s inflation target.