Economic Roundup, May 25, 2018

Economic Environment

  • Oil price

  • Electoral politics

  • Global economic situation

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

The economic environment this week is a carryover from the prior week with emphasis on the deterioration of the macro environment.

  • Though the growth outlook looks bright, the emerging inconsistency between the micro and macro environments is causing concern. While the micro economy points to healthy demand for goods and services, it could soon face headwinds if the macro environment is not cooperative affecting economic growth. India’s Economic Survey, issued by the finance ministry at the end of January, estimated that a $10 per barrel rise in global oil prices could reduce growth by 0.2-0.3 percentage points, increase wholesale price inflation by about 1.7 percentage points, worsen the current account deficit by about $9-10 billion and the outlook for the rupee even though a cheaper rupee is beneficial to Indian exporters. India needs to attract more dollars as India’s foreign reserves can give it a cover of only 10 months raising downward pressure on the rupee and the financial markets.
  • Slowing growth and rising inflation would be bad news for the economy because it presents a dilemma to the RBI and economic policymakers and will put downward pressure on the financial markets.
  • Another reason for the downward bias in the financial markets is electoral politics. The markets, after the Karnataka assembly election, are building-in expectations of a possible hung parliament in 2019 which could paralyze policymaking in New Delhi and dampen any expectation of reforms introduced during the first BJP term from taking hold.
  • The ongoing US-China trade talks are affecting the global markets in the immediate term. While the markets are buoyed by any prospects of a win-win resolution of trade issues between US and China, they are at the same time apprehensive of the situation deteriorating into a trade war. Also, the US-North Korea-China diplomacy to resolve the North Korea situation could be politically getting tied to the US-China trade negotiations, complicating matters.
  • From the Fed minutes, it is clear that US monetary policy is sensitive to market sensibilities about interest rates rising too quickly in response to US inflation firming around the Fed’s target. The communication by the Fed that it will tolerate inflation being reasonably symmetric around its target allays quick rate rise fears and puts the Fed on course to achieving neutrality of monetary policy during this year and the next. Though this is good news for the stability of the US economy, the eyes of the markets are also on any emerging divergence between the developed economies and any asynchronization of global growth. More will be known about the trajectory of global growth at the end of the June quarter.

    What to expect from the markets next week?

The Equity and commodity (with oil price firming in the USD 70-80/barrel range) markets in India are expected to be trading in a range-bound manner because of the absence of major triggers though the markets are concerned about India’s macro environment and its affect, looking forward, on the fundamentals and the rupee.

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