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 08, 2019

Economic Environment

  • Foreign Portfolio Investment (FPI) inflows into India

  • US 1st Quarter 2019 growth estimate and February 2019 jobs report

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

  • The services sector in India is performing strongly while growth is dampening in manufacturing and agriculture. The global economic environment has resulted in lower growth forecasts of the Indian economy in 2019 and 2020 because of slowing international trade. However, globally, on a relative basis, India continues to be the fastest growing major economy despite signs of slowing growth among the large economies including the United States in 2019. Efforts to support growth both by the Reserve Bank of India (RBI) and the incumbent government before the general elections in May 2019 are attracting FPI inflows leading to large buys across industry sectors, pushing up the equity market indices.

  • Within the context of Brexit, European growth and monetary policy, and US-China trade talks, US economic growth expectations in the 1st quarter of 2019 are significantly lower compared to the 4th quarter of 2018. This could be more because of the longest government shutdown in US history and the bottoming of unemployment and affects on growth of Trump tax cuts. After all, US may not be immune to growth slowdown which is being experienced around the world. The US Federal Reserve is taking a second look at its monetary policy stance under these conditions by signaling a slow down or even stopping monetary tightening.

What to expect from the markets next week?

Indian financial markets, once the affects of FPI inflows wane, could be range-bound and perhaps even flat.

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.