Economic Roundup, April 12, 2019

Economic Environment

  • March Consumer Price Index (CPI) Inflation and February Index of Industrial Production (IIP)

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

  • The March CPI is low at 2.86% but the February IIP came in very low at 0.1%. Low inflation is conducive to monetary policy expansion, however, as we analyzed in the two previous editions of the Economic Roundup, the Reserve Bank of India (RBI), while lowering the repo rate by 25 basis points to 6%, has emphazised the monetary policy transmission mechanism for accommodative monetary policy to be able to effectively invigorate the economy by spurring investment. 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 due to the elections. The RBI Governor is optimistic about the future of India’s economic growth and this optimism will only attract more hot money while keeping interest rates at current levels. Though this might help the RBI not to lower interest rates further or obviate the need for any fiscal expansion, government should keep a close watch on it without settling for its short term benefit to India’s foreign exchange reserves and the stock markets.

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. The true state of the economy would come to relief as corporations continue to report earnings.

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