Economic Roundup, August 03, 2018

Economic Environment

  • Reserve Bank of India (RBI) policy

  • Global situation

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

  • The Indian economy continues to expand in the range of 7.2-7.7% real GDP growth rate albeit amid steadily growing price pressures with consumer price index inflation expected to be at 5% by the first quarter of fiscal year 2019-20. The RBI, given its mandate, has paid particular attention to inflation, which, on balance, appears to be ticking up over the course of the coming year for a variety of reasons as discussed in the RBI’s policy statement released in August 01, 2018 and in our prior issues of the Economic Roundup. Given that monetary policy acts with a lag on the broader economy, it is only prudent to raise interest rates keeping the RBI’s medium-term inflation target of 4% in view and this is what the RBI has done in two consecutive meetings, as expected by us, while maintaining a neutral stance so as not to constrain growth. We expect the RBI to hold interest rates unchanged at its next meeting in October unless evolving economic circumstances during the intermeeting period warrant any changes.

  • Economic conditions appear to be tilting to the downside for China and the Asian countries in the China supply chain ecosystem because of the trade war with the United States. The affect on the Chinese economy of the US-China trade war would be clear by end-September (at the end of the third quarter of 2018) and this could pressure global commodity prices, including oil, should the Chinese economy appear to not be able to hold up. US trade war with the European Union (EU), Canada and Mexico and a few other countries such as India seems to be on hold because of the possibility of negotiated settlements of the issues involved. On balance, China, Asian countries in a supply chain relationship with China, and commodity exporting countries such as Canada and Australia could experience economic slowdown while economic growth in the EU could remain on track. It is, however, clear that global economic growth is no longer synchronized because of the trade war. Global growth could slowdown should the trade war, in particular between US and China, escalate.

    What to expect from the markets next week?

Indian markets will remain bullish next week as the earnings calendar continues. 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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