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.