India’s economic recovery remains on firm footing.

At a time when its export-dependent emerging market peers are biting the dust, the Indian economy seems to be going from strength to strength, with Q3 GDP data signaling solid growth, a shot in the arm for the Modi government which is seeking to push through key structural reforms stuck in Parliament.

 At 7.3 per cent clocked in the October-December 2015 quarter, growth in Asia’s third biggest economy remains heads and shoulders above major global economies. While India, a net commodity importer, is benefiting from an ongoing crude oil price collapse, oil-driven economies such as Brazil and Russia are in steep recessions, and growth in China has hit a 25-year low of below 7 per cent.

The centre has pegged India’s economic growth rate for FY 2015-16 at 7.6 per cent, marking an acceleration from last fiscal’s 7.2 per cent expansion.

A quick glance at Q3 GDP figures shows that barring the farm sector which has been hit by a deficit rainfall for a second year running, most sectors of the economy are in good shape with manufacturing output surging 12.6 per cent and private consumption holding up quite well. Moreover, Gross Value Added, a proxy for economic strength rose 7.1 per cent in Q3 FY 2015-16, year on year.

Going ahead, a lot hinges on the government’s ability to stick to its fiscal deficit targets, the progress of which will be unveiled in the upcoming Union Budget. Solid news on the fiscal consolidation front could pave the way for further interest rate cuts. Further, getting over the GST hurdle is also a big test that the NDA government currently faces.  

Latin Manhralal 

Currency war: Rupee sailing against Yuan tide

Ever since the beginning of this year, stock markets and the Indian rupee have continued to slide. The Indian currency has been gripped by Bears in recent times as global markets went into another tailspin along with China’s yuan devaluation that has triggered a capital flight from the emerging markets.

Rout in rupee continues as it has breached the 68 level against the US dollar for the first time in 28 months, with a sharp sell-off in equity markets causing fears of dollar outflows.

The Indian rupee is on the slide

The Indian currency is basically following the weakness seen in the rest of the Asian currencies. China’s yuan devaluation has come up as a major factor, hurting the sentiments globally. China has been witnessing a slowdown, with the International Monetary Fund has reiterated and while slashing the global growth forecasts for the third time in less than a year. IMF has cited a sharp slowdown in China trade and weak commodity prices that are thrashing Brazil and other emerging markets.

So far this calendar year, the rupee has fallen 2.7 per cent against the dollar, triggering to a substantial capital flight from the local equity markets. Overseas investors have pulled out close to Rs 7,146 crore crore from the Indian equity markets since the start of this year.

However, if this selling pressure from FPIs persists till the global mood stabilises, the rupee would soon hit its 2013 record low of 68.85 a dollar and perhaps even further plunge towards 70.

Why sliding rupee is not a concern?

However, there is still a silver lining. The rupee is still relatively stronger against its trading partners and the Reserve Bank of India is well placed with the firepower in the form of over USD 350 billion in reserves to defend the sharp depreciation in the rupee if needed

China rout: A worry for India

Yes, it’s China once again!

Stock markets globally took a hit last week after the Chinese central bank devalued the yuan sharply, a move that led to such a sharp decline in the Chinese stock market that trade had to be suspended twice.

China’s move to devalue the Yuan to the lowest level since March 2011 rattled investors. India too could not help falling prey to a global tsunami that wiped out more than USD 4 trillion from equities worldwide this year, reigniting fears of a fresh global currency war while signalling heightened worries over the health of the Chinese economy.

Indian markets hit Chinese wall

The People’s Bank of China lowered the value of the Chinese currency by 0.51 per cent to 6.5646 against the US dollar, putting stock markets and currencies worldwide under pressure.

The 30-share benchmark index, Sensex lost 4.68 per cent over the week, which made it the worst start to the calendar for the markets since the 5 per cent crash in the 30-stock pack in the first trading week of 2009. Even the weekly fall was at its worst in over four months.

Yuan decline to hurt India’s flagging exports

A continued devaluation of the Yuan by China may come as a further blow for the country’s exporters already reeling under the effects of a global slowdown, weighing on the outlook for Asia’s third biggest economy. India's exports have already been in a contraction mode for the past twelve months, plunging by 18.46 per cent to USD 174.3 billion year on year in April-November 2015, a sign that India isn’t immune to the current bout of global volatility amid a faltering Chinese economy, disinflation risks and the start of the US Federal Reserve’s interest rate tightening cycle.

Moreover, Yuan’s devaluation may also boost Chinese imports to India by making them cheaper, hurting domestic manufacturers.

The recent depreciation may also trigger a fall in rupee to keep it competitive in the export market. 

Why India need not fret over Fed’s rate hike move?

Bringing the curtains down on an era of near-zero interest rates, the US Federal Reserve finally raised its key benchmark rate by 25 basis points last week, ending a prolonged period of uncertainty in global markets. While the Fed’s decision was very much on expected lines, it may cause some repercussions on emerging markets which will become relatively less attractive in the wake of higher interest rates in the US. Further, the Fed’s verdict will provide a further fuel to the dollar rally which may cause more pain for dollar-denominated commodities, worsening a global commodity rout, threatening to hurt EM capital flows. But, India, blessed with superior macro-economic fundamentals, compared with EM peers is unlikely to be much affected by the start of the Fed’s policy tightening cycle. Let’s see why?

With a forex reserves kitty of over USD 350 billion, India has plenty of ammunition to deal with any potential volatility in global capital flows on account of higher US interest rates. Vast improvement on the current account front means that India’s external balances are strong, lending it less vulnerable to global shocks.

India, which doesn’t rely on commodity exports like its BRICS peers won’t be adversely affected by an ongoing commodity rout.

With a very small part of India’s sovereign debt held by foreigners or denominated in foreign currency, a strengthening dollar is unlikely to affect India much. Contrarily, a stronger dollar vis-à-vis rupee could boost the competitiveness of India’s exports which shrank for a twelfth month on the trot in November.

Moreover, India, being the world’s fastest growing major economy with growth clipping well above 7 per cent will continue to remain an attractive destination for foreign investors at a time when China is headed for the weakest growth in 25 years, and Brazil & Russia are in steep recession. At the same time, a progress on key reforms such as GST which faces the threat of delayed implementation amidst political roadblocks is critical for putting Asia’s third biggest economy on the path to attaining double-digit growth, and consolidating the country’s growing investment prowess.

Even as the Fed raised the target of its federal funds rate to 0.25 per cent to 0.5 per cent, from 0 to 0.25 per cent previously, it signaled a “gradual” pace of tightening, a sign that monetary policy in the world’s biggest economy will continue to remain fairly accommodative despite the first hike in interest rates in almost a decade. A measured pace of US policy tightening, coupled with record stimulus from Bank of Japan & the European Central Bank (ECB) and expectations of further monetary easing in China may prompt foreign funds to continue flocking to India amidst lack of any challenging alternatives elsewhere.

Back in the groove: IPO market sizzles in 2015

At a time when secondary markets are plying through choppy waters, traders are relying heavily on the primary market to safeguard their investments as both Initial Public Offering (IPO) and follow-on equity offerings attract strong investor interest.

Confidence is back in the IPO market as there is huge demand for diverse set of companies with completely new business models to hedge volatility and weak foreign fund flows prevailing in the equity market in the face of mounting domestic and global uncertainty.

The health care sector is looking very healthy in the department of initial public offerings, with the latest set of public offering by two entities, Alkem Laboratories and Dr Lal PathLabs, witnessing strong participation both from foreign and domestic investors, driven by investors’ increasing appetite to invest in unique companies that are fairly valued as secondary market valuations are not that cheap.

Alkem Laboratories received orders worth 44 times the number of available shares for its Rs 1,350 crore initial public offering, according to exchange data. Qualified institutional investors (QIBs) were the most active bidders, having placed orders worth about 57.2 times the number of shares slotted.

Meanwhile, Dr Lal PathLabs, a leading diagnostics chain operator, received bid for 2,14,51,060 shares against the total issue size of 81,20,000 shares for its Rs 630 crore IPO on the second day of the issue. The quota reserved for QIBs was over-subscribed 6.13 times, non-institutional investors received 57 per cent subscription, while retail category was subscribed 1.56 times, exchange data showed.

The IPO market will sign-off the year 2015, registering its best performance since 2010, driven by the success of marquee offerings of InterGlobe Aviation, Coffee Day Enterprises, Alkem Laboratories, Dr Lal PathLabs, Sadbhav Infra Projects, Prabhat Dairy and S H Kelkar.

With another power pack Narayana Hrudayalaya’s Rs 613-crore IPO lined up in the second week of December, the IPO companies are expected to raise Rs 14,000 crore this calendar year, the highest since 2010 when 64 companies raised about Rs 37,500 crore.

All in All, 2015 marked a reversal of trend when primary markets outshone secondary markets that have been plagued by bearish sentiments.

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