US economy and India economy
How are the Indian and global economic environments affecting the financial markets?
US economy has performed well above expectations in the first quarter of 2019. As we have said earlier, this can largely be attributed to Federal Reserve continuing to signal (as also expected next week) that it will pause on any further rate increases because of slowdown in the rest of the world economy. Also, the Federal Reserve has slowed down its process of balance sheet normalization so that it does not adversely impact liquidity in the financial markets. Major global central banks given the favorable inflation environment, across the board have sent dovish signals, with India, in fact, cutting the repo rate twice. Such preemptive actions should hold up India’s economy and the global economy without risk of a recession during the rest of the year. Europe and Japan, as we have discussed in the previous edition of the Economic Roundup, have demographic issues constraining growth despite accommodative monetary policy though it is not something to be imminently concerned about. India, however, must work expediently on banking sector weakness independent of the elections to prevent any slowdown from taking hold because of poor monetary policy transmission, for economic slowdown could trigger hot money outflows as we also discussed earlier. Geopolitics, at least for now, appear to be under control so as not to adversely affect the oil price which, if it sharply rises because of US tensions with Iran, could significantly impact the rupee and India’s economic outlook.
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 into greater relief as corporations continue to report earnings.