How are the Indian and global economic environments affecting the financial markets?
This week was taken up by the markets digesting the fallout from the collapse of the Turkish lira, the gyrations in the Turkish financial markets, and the trade war between the United States and Turkey. Emerging market currencies fell against the dollar, with the rupee being no exception because initially the markets feared that a contagion would spread among the emerging markets. However, Turkish problems seem to be specifically localized to Turkey given its twin deficits of budget deficit and trade deficit and low interest rates to prop up growth despite high inflation amid growing concern that the Turkish central bank’s policy independence has been compromised by the government. Indian markets were affected to some extent by Turkey and the rupee breached INR 70 to the USD with the possibility that the Reserve Bank of India (RBI) could or possibly has already intervened in the foreign exchange market to put a floor under the rupee but the most affect has been on markets with exposure to Turkey. The fall of the rupee has not affected the Indian equity markets which, albeit volatile, particularly in the banking sector, have remained bullish.
Commodities including oil are being pressured due to concerns about global growth amid the US using tariffs as a weapon of choice with countries with whom it has diplomatic issues as exemplified by the Turkey situation.
What to expect from the markets next week?
Similar to this week, Indian markets may vacillate but with low volatility between being bullish and flat next week as the earnings season comes to a close toward the end of this month. Oil price may continue to move in a range-bound manner between USD 65-80/barrel, falling due to the trade war and global growth concerns. Likwise, the other commodity markets will move based on, among other factors, how the Chinese economy and the rest of the world economy is reacting to the trade war. Annual inflation has come down to 4.17% in July and if this trend continues it could make the RBI hold interest rates at its October 2018 meeting giving the financial markets a breather from RBI pressure.