Economic Roundup, July 27, 2018

Economic Environment

  • Good and Services Tax (GST) rationalization

  • Oil and commodities

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

  • The rationalization of the GST by the GST council has slashed taxes on several items and made filing tax returns simpler for a larger tax base covering about 93% of all taxpayers. This will make compliance easier and could increase the revenues for the government. GST rationalization is an ongoing process until the government achieves the desired design. Rationalization, which could, at some point, even bring petrol and diesel under GST, could ultimately have only 4 slabs at 0, 5, 15, and 28 per cent, with a majority of goods and services falling under the first three slabs, while achieving the goals of simplicity, higher compliance and higher revenue. The financial markets have reacted favorably to the tax easing.
  • Oil price, rangebound in the USD 65-80/barrel range, along with other commodities is being pressured because of concerns about the trade war. In India, despite the downward pressure on the oil price, it being still relatively high compared to the past years, any downward drift is being welcomed by the Indian financial markets while the opposite is resulting when the oil price inches up. Copper, a bellwether commodity, has dropped steeply into bear market territory while trying to recover because of uncertainty about demand from China. Copper price closely follows economic growth in US and China and downtrend in its price has preceded economic downturns in both countries. While China’s economic growth is under pressure because of the trade war, and the US, looking forward, is getting off of a growth spurt in the April-June 2018 quarter, China’s targeted monetary easing measures (while continuing to deleverage the economy) and stable US growth could make copper recover. It is too soon to predict any steep downturn in economic activity in the either the US or China.

What to expect from the markets next week?

All-in-all, the Indian markets look bullish. Next week, the behavior of the equity and commodity markets in India and in other major economies will remain consistent with that of this week. They are expected to continue to remain stable and react to the second quarter earnings reports against the backdrop of the oil price and the trade war. Oil price may continue to move in a range-bound manner between USD 65-80/barrel, falling due to the trade war concerns and rising due to market tightness amid global growth. The other commodity markets will move based on, among other factors, how the Chinese economy is adjusting to the trade war.

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