Will upcoming RBI policy meet change the mood at Dalal Street?

Modi magic saw 2014 becoming a great year for Indian stock markets, with the benchmark Sensex flaunting a prestigious tag of world’s second best major performing market. However, the mood at the Dalal Street Bulls seems to have dampened in recent sessions with foreign investors in pullback mode amidst the fury over the Minimum Alternate Tax (MAT).

Falling from a life-time high of over 30K in early March, the Sensex rally has lost steam, while volatility has heightened as tepid March corporate earnings numbers renewed skepticism over Asia’s third biggest economy, while stalled progress over two key bills pending in the Parliament i.e. Goods and Services Tax & the controversial Land Acquisition Reform have also tired investor appetite. The depreciation of the Rupee against its US counterpart, and forecasts of a below-par monsoon haven’t helped Dalal Street’s cause either. Spooked by concerns that the government will impose a 20 per cent MAT on capital gains over the past seven years, overseas investors seem to be in exit mode, keeping the Sensex below 28K.

The see-saw ride in the market has left the investors wary about the direction of Sensex. The much awaited interest rate cut by the RBI at its upcoming policy meet on June 2, 2015 can serve as a much needed mood lifter for Indian markets, with a 25 bps reduction on the cards amidst softening inflation. Consumer inflation, the RBI’s main inflation gauge, fell to a four-month low of 4.87 per cent in April 2015, remaining well below the 6 per cent goal for January 2016, while the government contained its fiscal gap for 2014-15 at 4 per cent of GDP, below the 4.1 per cent budget target, leaving ample scope for a third rate cut this year.

Moreover, the rupee has stabilized while foreign investors have been given immediate relief over MAT recovery with a government –appointed committee looking into the matter. Investors will eye progress over the GST and the Land Acquisition Bill which have been sent to a joint parliamentary panel for review after running into heavy resistance from opposition parties and allies, and are now likely to be passed in the Monsoon Session.

A timely monsoon would be a boon for the Indian economy and help bolster rural demand while keeping inflation under check. A slowing US economy has also pushed back bets of a rate hike, meaning that a flush of global liquidity owing to the Fed’s zero interest rate policy stance and record QE in Europe and Japan will continue to find its way into Indian markets.

Robust progress on structural reforms including easier tax norms and further interest rate cuts could power the Sensex back to 30,000 in the next few months.

Will Gold Regain Its Glitter?

All that glitters is not gold! Pegged back by a roaring dollar at multi-year highs, jitters over US monetary tightening and a global commodity rout, the yellow metal seems to have lost some of its luster, with the bullion extending its bearish ride into 2015.

Gold has shed over 1 per cent in the domestic market in 2015 as a stronger dollar bites demand for the bullion as an alternative asset by costing more to those holding other currencies. To add to the woes, the tremors of the oil price rout have also taken toll on Gold as investors fret over slowing global inflation, denting gold’s appeal as a hedge against rising prices.

However, the cloudy days for Gold may be over with the precious metal set to regain some of its sheen as an influx of global liquidity amid record QE injections from central banks in Europe and Japan and further easing from China bolster the bullion, a hedge against the inflationary risk of monetary stimulus. China has cut interest rates thrice in the past six months, with the latest reduction of 25 bps coming last Sunday, as policymakers look to stave off a worsening slowdown.

Moreover, doubts hover over the timing of a maiden US rate lift-off since 2006 with tepid Q1 growth and labour market slack prompting many analysts to pare back expectations of monetary tightening in the near-term, adding to the sheen of Gold, which tends to flourish in ultra loose monetary policy regimes.

Further, the greenback has also retreated from 12-year highs while oil prices are on their way up. Gold will also find comfort from safe haven demand as Greece stares at a potential default that could shake-up global financial markets, while the worsening situation in the Middle East, uncertainty over Iran-West nuclear pact, Russia-Ukraine tiff, will offer support to prices.

Another import element in the Gold story will be demand from India, the world’s biggest gold consumer. Shrugging off rupee depreciation and import curbs, the love affair between India and the precious metal remains strong as ever. Bullion imports soared to 125 tonnes in March from 60 tonnes in the year ago month.

Our verdict:  Bullion will Rise and Shine again amidst uncertainty over the global economic recovery and record cash injections from central banks. 

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Is India the most lucrative bet for overseas investors?

Since the pro-growth and investor friendly Modi government assumed the mantle of reviving the Indian economy by accelerating long-stalled reforms, India has emerged as the lone shining star of the global economy, which is still struggling to find its footing even seven years after the Great Recession.

The government’s drive to boost the country’s investment climate including the much campaigned ‘Make in India’ reform & hikes in FDI caps in sectors such as defence & insurance, coupled with investor friendly tax regimes have put India on the path of double-digit growth, with the country tipped to surpass China as the world’s fastest growing major economy.

Rolling out the red carpet for foreign investors, the NDA government has raised the FDI cap in the insurance sector from 26 per cent to 49 per cent, whereas the defence sector FDI cap was hiked to 49 per cent from 26 per cent, while allowing 100 per cent FDI in Railways, paving the way for an overseas investment boost. According to government data, FDI in India soared to the highest in 29 months in January 2015 at USD 44.81 million.

Moreover, India’s growing economic prowess has been recognised by leading global rating agencies & top institutions such as World Bank, which sees India clocking 7.5 per cent growth this fiscal as it steps up economic reforms and encourages domestic companies to become "globally competitive".

Rating agency Moody’s also recently revised its outlook on the country from stable to positive while Fitch has pegged India’s GDP growth at 8 per cent in FY 16 with growth set to accelerate to 8.3 per cent next fiscal.

Further, plunging oil prices have come as a major boon for Asia’s third biggest economy which imports nearly 70 per cent of its oil needs. A reduced oil import bill has narrowed India’s fiscal and current account deficits while pushing inflation well below the targeted 6 per cent, allowing room for a double rate cut to revive the investment growth cycle.

Meanwhile, the global economy remains entrenched in a steep slowdown with growth in China plummeting to the lowest in more than two decades; Russia & Brazil are on the cusp of a recession, and a stronger dollar has arrested the US momentum, while Europe and Japan continue to wrestle with deflationary fears, arguably making India the best bet for global foreign investment.

 Road Forward

Foreign investment inflows both FDI and FII’S are expected to increase tremendously nearly more than 2 times in FY15 as overseas investors gains confidence in India’s Modi government, as India requires funding in infrastructure sectors like highway, ports and real estate.

But India also has do its part to realize FDI potential like improving its economic ecosystem, easing FDI regulations, working on regulatory environment and also develop infrastructure from its means.