Where is Dalal Street headed as December looms?

After a stellar performance in 2014 when the Sensex emerged as the second-best performer among major markets, 2015 has brought little cheer for Dalal Street traders with the 30-share benchmark tumbling over 6 per cent so far this year, as slow pace of reform implementation, a sluggish economy and global headwinds fuelled an exodus of foreign capital.

Discontented by the progress on key reforms such as the Goods and Services Tax (GST) and the Land Bill which have been hit by political roadblocks, coupled with heightened speculation of an imminent interest rate hike by the US Federal Reserve, foreign institutional investors (FIIs), a key driver of Indian equity markets, have pressed the exit button, selling Indian stocks worth USD 672 million in November thus far, the most among emerging markets after South Korea.

A tepid bag of Q2 earnings numbers, a continued export slump, the slowest factory growth in four months in September and a pickup in the pace of consumer inflation to a four-month high in October, are indicative of the fact that Asia’s third biggest economy has lost momentum, adding to the gloom and doom at D-Street.

As we approach the end of the calendar year, the Sensex is likely to be driven by three major factors i.e., the outcome of the Winter Session of Parliament which is crucial to deciding the fate of key bills such as the GST & the Land Bill stuck due to policy stalemate, the RBI’s policy meet on December 1 and the Fed policy outcome on December 15-16.

The BJP’s disastrous showing in the recently held Bihar elections means that the ruling NDA government still lacks the numbers to push through key economic policies in the Upper House of Parliament. However, if Modi and his men are able to muster enough support from the opposition and get key legislations passed, the Sensex could be in for a major positive surprise. While the government has its hands full as far as getting opposition parties on the same page with regards to key bills, it has signaled some seriousness over re-starting the stalled reform process by giving nod to a 10 per cent stake stale in Coal India, approving the IPO of Cochin Shipyard and announcing a five-year interest subsidy scheme for exporters.

The RBI is unlikely to oblige with another rate cut next month & maintain status quo on policy rates amidst a resurgence of consumer inflation which accelerated for the third straight month in October 2015, to 5 per cent from 4.41 per cent in September 2015, and as the central bank awaits the Fed policy decision.

Even as markets have already priced in a rate lift-off by the Federal Reserve next month, the occurrence of the actual event could prompt a knee-jerk reaction in domestic equities. But, stronger fundamentals compared to EM peers are expected to ensure that Indian stocks may be less affected by a Fed borrowing cost hike. Fed members have signaled a strong case for a hike in short-term interest rates for the first time in almost a decade, next month.

In the absence of any positive surprise on the reform front, the Sensex is likely to see a range-bound and tepid December, with foreign investors unlikely to bet big on Indian stocks amidst delayed reform implementation.

Latin Manharlal Group

Is Indian economy losing steam?

It seems that Indian economy is still not out of the woods as disappointing set of economic data are signaling  weak  momentum for Asia’s third biggest economy.

A slowdown in industrial output growth to the lowest level in four months in September along with a pickup in the pace of consumer inflation to a four-month high in October has put India’s economic recovery in doubt, crimping room for a further interest rate cut in the ongoing fiscal.

India’s industrial production expanded 3.6 per cent, year on year in September 2015, compared to a revised 6.2 per cent annual rise in August 2015, whereas consumer inflation accelerated to 5 per cent in October 2015 from 4.41 per cent in September 2015.

While the 6 per cent retail inflation target for January 2016 will almost certainly be met, Raguram Rajan is likely to keep borrowing costs unchanged on December 1, 2015 amidst a quickening of inflationary pressures and a likely US interest rate hike in mid-December.

RBI in its September bi-monthly monetary policy review had cut interest rate by 0.5 per cent, much higher than the expectations for a rate cut of 25 basis points. The benchmark repo rate has subsequently come down from 7.25 per cent to 6.75 per cent, the lowest in four-and-a-half years.

Adding to the economy’s setback, India’s wholesale prices remained mired in deflationary territory for the twelfth month on the trot in October 2015 reflecting the effects of lower commodity prices owing to global factors and subdued demand conditions.

According to government data, Wholesale prices fell by 3.81 per cent in October 2015 from the same month a year ago.

The key macro indicators evidently point out that the economy still faces several tough challenges and an effective strategy is required to deal with the situation.

Latin Manharlal

Is India well placed among EMs amidst global financial crisis?

Even amidst heightened volatility in global financial markets and deepening economic crisis in China, India which has rightly claimed the honour of becoming the worlds’ fastest growing major economy remains the best bet for investors among emerging markets. Let’s see how?

Is India’s investment landscape more appealing than its BRICS peers?

Despite slightly succumbing to a global rout amidst fears over China’s economy, India seems to remain a stand-alone portfolio bet for emerging markets investors and fund managers. India’s sound economic fundamentals backed by strong reforms commitment by the investment-friendly Modi government, contrasts with that of China’s economy that grew at its slowest pace since the global financial crisis in the third quarter, while peers Brazil and Russia are on the edge of a catastrophic recession amid an oil price slump & political jitters.

Oil price slump: A boon for Indian economy

The downturn in oil prices has come as a blessing in disguise for Asia’s third biggest economy which imports nearly 70 per cent of its oil needs. However, the crude turmoil has pushed oil-driven Russia and Brazil on the cusp of a recession.

Given that oil is India’s largest import item, 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 the Reserve bank of India for further rate cuts to revive the investment growth cycle.

From 8.8 per cent in January 2014 and 7.31 per cent in June 2014, India’s consumer inflation has plunged to 4.41 per cent in September 2015, luring the investors to park their funds in Indian markets.

India’s improving investment scenario has gained momentum in comparison with the gloomy outlook of its BRICS peers. At the time, when sanction-hit Russia is witnessing a capital flight, while FDI prospects in Brazil is also moving in opposite direction and China growth plummeting to the weakest rate since the global financial crisis of 2009, India’s investment climate remains apt amid the much campaigned ‘Make in India’ reform & hikes in FDI caps in sectors such as defence & insurance, coupled with investor friendly tax regimes.

Is India falling prey to a global slowdown?

Not withstanding strong fundamentals, Asia’s third biggest economy seems to have succumbed to a global rout amidst fears over China’s economy.  Growth has faded across both the manufacturing and service sectors, fully justifying the Reserve Bank of India’s aggressive 50 basis points interest rate cut last week, as softening inflation leaves ample leeway for monetary easing.

India’s services activity expanded at a weaker clip in the month of September as demand eased amidst tough economic conditions. Meanwhile, India’s manufacturing activity also expanded at the slowest pace in seven months in September as factories boosted output at weaker rates amidst waning demand, signaling a loss of momentum in the Indian economy.

India’s services activity gauge fell from 51.8 in August to 51.3 in September, whereas the gauge measuring manufacturing activity in India slid to 51.2 in September from 52.3 in August.

Adding to the economy’s setback, the Washington based lender, International Monetary Fund (IMF) has cut its growth forecast for India to 7.3 per cent from 7.5 per cent in FY 2015-16 predicted earlier.

Since the beginning of last month, forecasts on India’s economic growth by various agencies have been mostly negative, however, the overall picture does not look too gloomy as key reforms of Modi government along with RBI’s dovish stance may bolster economic growth and accelerate investment cycle.

Further, the Prime Minister Narendra Modi’s assurance that the stalled Goods and Services (GST) reform amidst Parliamentary logjam, will be rolled out in 2016, to improve the investment climate in the country will provide the much needed rest on the growth front. The governments’ big thrust area is to improve and expand manufacturing competitiveness of India and it has undertaken numerous initiatives to further enhance the ease of doing business in India.

Is the end of Rupee’s woes in sight?

Against the backdrop of turmoil in China and jitters over a looming US interest rate hike, the Indian rupee has been gripped by Bears in recent times as an uncertain global economic outlook triggered a capital flight from emerging markets. The Rupee has shed 4% of its value this year, while tanking over 2% since August 11 when China’s decision to devalue the yuan by the most in two decades sent shock waves to financial markets worldwide. However, the US Federal Reserve’s surprise decision to refrain from a hike in borrowing costs brought some relief to the domestic currency, which registered its biggest gain vs the greenback in two years, surging to a one-month high on Friday.

However, the rupee’s comeback may be short-lived with high uncertainty still prevailing on the global front, meaning that the currency will be prone to downward pressure that will be cushioned by expectation of further policy easing by the RBI and hopes of progress on key reforms. We explain below why.

Firstly, Even as it maintained status quo on interest rates last week, Fed meeting materials show that 13 out of the 17 policymakers warrant a rate hike this year, meaning that markets must brace for US policy tightening in the near-term. The Fed which has kept its key rate near Zero since 2008, next meets on October 27-28 and then on December 15-16. Higher interest rates in the US will increase the lure for US dollar denominated assets that may lead to further capital outflows from risky assets, causing the rupee to depreciate, taking severe toll on Indian companies having large overseas debt.  Foreign investors, who pulled out a record Rs 17,428 crore from Indian stocks in August 2015, have emerged as net sellers of Indian equities & bonds to the tune of Rs 4,600 crore in September, thus far.

Secondly, the ‘China’ factor will continue to dominate sentiment across global markets with uncertainty surrounding the full extent of the country’s slowdown. Recent factory, investment and export data have signaled that China’s woes seem to be deepening, defying efforts by policymakers to fix the country’s slowdown. Being the world’s second biggest economy and the largest commodity player in the world, a rout in China means diminished fortunes for the global economy, hence inviting risk aversion among foreign investors.

Thirdly, it is foolish to pin the entire blame of an FII exodus on global factors as slow progress on key reforms such as the GST which has been derailed by political headwinds, and a domestic economic slowdown have also contributed to the rupee’s slide in recent weeks. India’s economic growth slowed to 7% in the June quarter from 7.5% in Q4 FY 2014-15 while exports have been in contraction terrain for nine straight months.

However, its’ not entirely looking murky for the rupee as the Fed’s move to hold off an interest rate hike has almost guaranteed an RBI rate cut on September 29 which should support sentiment. The possibility of at least another rate cut beyond September, in the ongoing fiscal, looks high as a softening global commodity cycle amidst weakness in China keeps oil prices lower, narrowing the fiscal and current account deficits, taming inflation. At the same time, the RBI will keep a close watch on the effect of a deficient monsoon on food prices which may limit policy easing room.

On the growth front, much rests on the Modi government’s ability to fast track key reforms with hopes riding high on the passage of the GST bill in the Winter Session of the Parliament. Recent measures to boost public investment in roads and railways may bolster economic growth while a quick fix on the problems plaguing the banking sector which is sitting on a pile of stressed assets, is also the need of the hour, a move which may revive credit growth and accelerate the corporate investment cycle.

The Bottom-line- the Rupee may continue to depreciate against its US counterpart in the coming months amidst uncertainty over China and a US rate hike,  with hopes of a rebound in the domestic economy  likely to offer some relief.

What’s Ailing Dalal Street?

Gloom and Doom has descended on Dalal Street which has been hit by the triple whammy of deepening China woes, jitters over the timing of a maiden US interest rate hike since 2006 and a domestic growth slowdown, triggering an exodus of foreign capital from Asia’s third biggest economy.

Let’s have a glance at the dismal performance of Indian stocks, lately which have fallen prey to a global financial market rout amidst fears over a worsening slowdown in China coupled with a looming US interest rate hike. Marking four straight weeks in the red, the Sensex, the second best performer among top markets in 2014, has sank almost 12% since the start of August, crashing to a 15-month low of below 25K, while the rupee too, has bitten the dust, plummeting to a two-year low, falling past the 66 mark vs. the USD as foreign investors exit risky emerging market assets amidst signs of a fast faltering global economic recovery.

China’s decision to devalue the yuan by the most in two decades which fueled fears over a fresh global competitive currency war has sent global stocks in a tailspin with the so-called Black Monday (August 24, 2015) wiping out as much as USD 2.7 trillion from equities worldwide including Rs 7 lakh crore from the Sensex, which recorded its third worst day in history.

As if the China and the US factor wasn't enough, slowing economic growth has exacerbated the domestic market’s woes, prompting a record sell-off of Rs 17,428 crore from Indian stocks by overseas investors in August 2015.

India’s economic growth cooled to 7 per cent in the April-June 2015 quarter from 7.5 per cent in Q4 FY 2015-16 while manufacturing expansion eased in August and growth of the eight core infrastructure sectors hit a three-month low in July, dashing optimism over the India growth story.

Looking ahead, no major respite is in sight for Dalal Street in the near-term with caution set to prevail ahead of the two-day meet of the Fed on September 15-16 where the world’s top central bank may offer some cues over the timing for monetary tightening in the US. Domestically, the focus will be on the July IIP data due on Friday with a slowdown in industrial output growth likely to raise calls for an RBI rate cut on September 29. Investors will also seek progress on key reforms such as GST which has been hit by political roadblocks.

Is Indian economy poised to weather the global economic storm?

India, Asia’s third biggest economy is holding its head above water during a shaky time in the global economy. While India has also succumbed to a global markets rout, the country’s strong fundamentals will ensure that it will emerge strongly from this temporary setback.

Why the global economy rout isn’t a big worry for India?

The ongoing rout in the global stocks and deepening economic crisis in China has engulfed Indian benchmark indices, leaving Dalal Street shaken with the Sensex falling off the 26K cliff, shedding more than 5 per cent in August and the rupee  hitting a two-year low, falling to 66.74 per dollar amid China’s currency stunner.

A crash in global commodity prices amid China's move to devalue its currency, coupled with fears surrounding US policy tightening has created havoc in the global financial markets.

However, the impact of the ongoing global financial turbulence on India is expected to be only short-term & restricted to exchange rate volatility and stock market movement.

The country’s strong fundamentals, depicted by recent economic indicators, back up the strengthening growth story of Asia’s third biggest economy. India’s retail inflation cooled to a record low at 3.78 per cent in July, coupled with industrial output growth which quickened to 3.8 per cent in June 2015, year on year from 2.5 per cent in May 2015, along with a combined gauge of manufacturing & services rebounding into expansion terrain in July, while car sales soared 17 per cent in July.

In a nutshell, India is better placed to deal with the global shock-waves, amid the government’s strong reform commitment and prospects of further rate cuts with inflation under permissible limits, despite heightened global uncertainty.