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.