Steady growth, lower inflation but external macro pressures
How are the Indian and global economic environments affecting the financial markets?
India’s industrial output in July had risen 6.6% year-on-year – slightly below June’s 6.9% but in line with expectations due to robust demand for consumer durables. Inflation cooled to 3.9% year-on-year in August. However, external pressures on the macro economy continue to persist because of the increase in oil price and the depreciation of the rupee. The cheap rupee is widening the current account deficit (CAD) despite higher exports due to the higher cost of imports. Foreign Portfolio Investment (FPI) needs to be watched for its affect on India’s foreign exchange reserves which are, at the moment, sufficient for 8 months of foreign exchange payments assuming no inflow of reserve currencies. Though India is better off than its fellow emerging market countries on foreign exchage reserves, it needs to be careful about its balance of payments situation. It will be a close call for the Reserve Bank of India (RBI) on interest rates in October because of the build up of macro pressures. The Monetary Policy Committee (MPC) could preemptively raise the repo rate by 25 basis points or wait for any pass-through of oil price and the rupee to inflation. Higher rates by the RBI could dampen enthusiasm for stocks, attempt to put a floor under the rupee, and raise bond yields. There are also new warnings about an increase in the non-performing assets (NPAs) of banks due to possible loan defaults by medium and small enterprises (MSMEs) which puts downward pressure on bank stocks.
What to expect from the markets next week?
Indian equity markets, although trading near all-time highs, will continue to remain sensitive to oil price and the rupee. External macro pressures are expected to contain the rise in stocks. 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.