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.