Economic Roundup, April 05, 2019

Economic Environment

  • Reserve Bank of India (RBI) policy

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

  • As we analyzed in the previous Economic Roundup, the RBI, while lowering the repo rate by 25 basis points to 6%, has emphazised the monetary policy transmission mechanism for accomodative monetary policy to be able to effectively invigorate the economy by spurring investment. All our prior analyses continue to hold. It is unclear at the moment, given the upcoming elections, whether banking sector reform can continue to remove impediments to investment. Further, it is also unclear if fiscal expansion is possible before the 2nd Quarter of fiscal 2019-20. All of this even as hot money continues to flow into the country.

What to expect from the markets next week?

The financial markets could continue to maintain their upward momentum if foreign institutional investment (FII) continues to flow into India though this also poses a risk should the economy slowdown because of the rising probability of the reversal of hot money flows which would pressure the current account deficit (CAD), potentially leading to a financial crisis. Many economists concur that the current data on economic growth may not be accurately reflecting the state of the economy. Policy flying blind because of data quality issues could catch the RBI and the government behind the curve on both policy and reform amidst the distraction of the election. More would be known as corporations continue to report earnings.

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