Global political-economic situation, oil price and the rupee
How are the Indian and global economic environments affecting the financial markets?
The prospect of reimposition of US sanctions on Iran in November with the primary aim of removing Iranian oil from the global market has led to rise in oil price. This, in turn, has led to fears of Indian current account deficit (CAD) rising because of rising import costs due to India’s oil imports. On net, such a development would put pressure on India’s US dollar reserves if inflows of foreign direct investment (FDI) and foreign portfolio investment (FPI) do not return to the country in at least the same measure as the FPI which recently left the country after the commitment by the Fed to gradually raise US interest rates. Though a cheaper rupee is good for Indian exports, the cost of rising imports will put pressure on inflation making the Reserve Bank of India (RBI) look closely at inflation, of course, depending on the inflation outlook, to make future interest rate policy. The high gross domestic product (GDP) growth of 8.2% year-on-year in the quarter ending June 2018 (first quarter of fiscal year FY 2019) will give the RBI some leeway in controlling inflation should the need arise assuming that strong growth will continue for the rest of FY 2019. Global cues have been sharply negative for Indian equities over the past week. It is clear that the equity markets shifted their focus to geopolitical (Iran), global trade (primarily US-China) and emerging markets (Brazil, Argentina and Turkey) risks after the end of the earnings season to sell-off on a high for profit-taking. The Indian equity markets continue to hover near all-time highs despite the sell-off.
What to expect from the markets next week?
Indian equity markets will continue to remain sensitive to oil price and the rupee. 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 but could rise somewhat due to the build up to the reimposition of sanctions on Iran by the US in November. 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 and concerns about global growth. There are as yet no worrisome triggers to drive the markets down by a large extent. However, the developing situation between US and Iran merits watching carefully because it has the potential to disrupt world oil supplies due to any actions by Iran in the Strait of Hormuz which could push oil prices higher.