US economy and global growth concerns
How are the Indian and global economic environments affecting the financial markets?
The primary concerns of the Indian financial markets at the moment are (1) the possible slowdown of the US economy against the backdrop of continued gradual increase in US interest rates by the Federal Reserve sticking to the Fed’s earlier projections and the fading US fiscal stimulus and (2) the impact of the trade conflict between US and China on Chinese, German and Japanese economies leading to a global slowdown of economic growth as projected by both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). Unless the US Fed revises its macroeconomic projections at the final meeting of the Federal Open Market Committee (FOMC) in December, uncertainty is building about the future path of interest rates in the US given slowing US and global growth because, in the worst case scenario, there could be a US and/or global recession by 2020 due to trade conflicts and US interest rates. Despite strong domestic economic growth and the benefits of the falling oil price, Indian financial markets are reacting negatively to these concerns about the rest of the global economy, taking cues from financial markets in US, Europe and Japan and, therefore, on net, their behavior is mixed.
What to expect from the markets next week?
Indian financial markets will continue to be mixed next week just as they have been this week, digesting the mixed signals from – on the one hand – India’s strong growth, low inflation, the falling oil price and improving current account deficit (CAD) and – on the other hand – the prospect of rising interest rates in the US and the repatriation of US dollars by foreign portfolio investors (FPIs), slowing global growth, and the fragile health of the domestic banking and finance sector. The markets could have more direction in December after (1) the meeting of the Organization of the Petroleum Exporting Countries (OPEC), (2) Reserve Bank of India’s (RBI) bi-monthly monetary policy committee (MPC) meeting and possible change in RBI policies to address financial sector issues, and (3) FOMC meeting about US interest rates and get away from range-bound, flat, and drifting behaviors of the past couple of weeks.