27 Jan 2015
The prevailing sentiment seems to be that the QE action announced by the ECB would be enough to offset the end of QE in the US in terms of liquidity in global markets. Benign inflationary conditions may even postpone the start of interest rate increases by the Fed into 2016. Mrs. Yellen may not wish to take the stick to financial markets until there is more evidence that the middle classes are benefitting enough from economic recovery to sustain aggregate demand. In Europe, Mario Draghi is now going to need policy support from individual governments to capitalize on his monetary action to ensure recovery takes hold. That is by no means a given. Meanwhile strategists are again promoting the US Dollar for 2015, along with US and European equities while still cautioning on Emerging Markets. This year, however, they are singling out India as an exception.
Let us recall some good reasons. GDP growth is forecast in the 6-7% range and rising gently. The external balance is benefitting from the low cost of oil and other import commodities. The fiscal balance will also benefit, presenting the Finance Minister with a favourable background for the Union Budget at the end of February. The Indian economy is still heavily domestic demand-driven, which provides a cushion against weak economic conditions elsewhere. Foreign reserves are especially strong under the management of a highly effective Reserve Bank governor who has finally taken advantage of improving economic data to embark on what looks like an extended period of interest rate cuts. Following his first 25 basis point cut, the market is expecting anything from another 25 to 75 basis points in reductions this calendar year.
26 Jan 2015
The state visit by US President Obama will be curtailed because the President needs to go to Saudi Arabia to pay his respects on the death of the King. Nonetheless, the visit is being hailed as historic because it is the first time a US President has visited India twice while in Office. The visit has delivered a conclusive agreement on the civilian us of nuclear power with India, which is rumoured to include an insurance pool to cover suppliers against liability for accidents. The agreement saw the US dropping a demand that all supplies of nuclear fuel be fully traceable after delivery, which India felt was intrusive. It would be too much to expect that everything is going to go swimmingly for investors in India this year but the balance of probabilities suggests that they will enjoy another year of good performance in 2015.
Global equity markets had a strong week as they absorbed the news that the European Central Bank had finally adopted QE, at a level which surprised positively. India continued to enjoy a glow from the start of monetary easing, with the Nifty adding 322 points to close 3.8% up at 8836 after trading in a range of 4%. Daily trading volumes stayed above their rolling average at $3.7bn as FIIs returned in size on the buy side: investing a net $708mil as domestic institutions sold a net $475mil. Volatility was stable, the India VIX staying in the high teens after a brief drop to 13, closing at 18 for a gain of a point on the week. Market breadth was very strong with advances outnumbering declines by six to one; concentration was mainly in the Financial Sector which made the largest contribution to the points’ gain. Index futures closed at a premium of 1% to cash.
23 Jan 2015
Helpful data points came in the form of another low CPI print: 5% in December in spite of unfavourable base effects; WPI also came in better than expected at 0.1%. November’s IIP came in at 3.8% compared to -4.2% in October: capital goods and basic industries were stronger even as weakness in consumer durables continued. This background brought a helpful surprise to the markets, however, as the RBI governor decided to deliver on one of his promises: to bring a cut in interest rates without waiting for another policy review meeting. The market was duly surprised, absorbed the 25 basis point cut and started looking for the next cut to follow the Union Budget. Maybe governor Rajan will surprise again, inflation looks like settling well below his target of 8% for some time.
The government has taken a third bite at the cherry by further increasing duty on petrol and diesel at a time when it can be absorbed without increasing the retail price. In spite of fiscal expenditure hitting 99% of budget by the end of November, moderating fuel subsidy costs and benefits from the declining oil price should enable the Finance Minister to meet the adjusted target for the fiscal deficit of 4.1% of GDP in time for his Union Budget at the end of February. The peak power deficit fell to a low of 3.3% in December, thanks to the effects of improved coal supplies, capacity additions and the connection of the southern transmission network to the national grid.