Indian Economic & Financial Outlook – 2019

Jan 08, 2019 | 5 months ago | Read Time: 3 minutes | By Mr. Saibal Ghosh

The year has started on a positive note. The international oil prices are down by more than 40% in the last 3 months. India being one among the top 4 oil consuming countries in the world with more than 3/4th of its oil demand met by imports has been the biggest beneficiary of this fall. Imagine a situation that how a household would be benefited if a big part of his/her monthly expenses (say something like groceries/electricity bill etc.) drop by 40 %! The same is true for the Indian economy when it comes to fall in oil prices in recent past.  However, the international prices of oil is a function of a very complex eco-political dynamics which changes by the day. As a result, the international oil prices have been extremely volatile in recent past. Let us hope that recent drop in oil price remains where it has fallen to for a longer period of time for benefits to pass on meaningfully to the real economy.

If oil prices remain soft then it will also put downward pressure on inflation which in turn will make room for the Central Bank (RBI) to change its existing policy stance of “calibrated tightening” to may be a “cut “at some point of time in near future. In this context please note that when inflation is high which is a result of excess demand over supply in the economy then the RBI raises interest rates to curb demand to check inflation, and vice versa. Now since the price of a high consuming product like oil has fallen significantly from the peak then the RBI may not require to raise rates from the current level to control inflation. On the contrary, it may reduce interest rate at some point of time to boost demand in the economy for accelerating economic growth.  The bond market has anticipated this and 10 year Government securities yield (the rate at which the bonds get transacted in the market) has fallen by almost 70 bps (100 bps = 1%) from its peak in last 3 months. The fall in interest rates is good news for both equity and bond market. The equity will be benefitted from a lower cost of fund to do business while bond returns improve when interest rate comes down.

While there is good news in terms of lower oil prices and a temporary truce in US-China trade war but there may be some short-term Uncertainties which both fixed income and equity market have to deal with. The first will be the last budget to be presented by the current the government in a months’ time from now. The market will watch for a larger than expected fiscal deficit. Higher than expected fiscal deficit means that the government has spent more than what it has earned during the year. If the gap is significantly large then the government has to borrow that much more from the market to meet both its ends. This, in turn, can put pressure on interest rates and crowd out precious capital required for funding the economic growth. Secondly, the uncertainties around politics will be an overhang till May ‘2019. And third, there may be earning disappointment that may show up  in Q3FY19 earnings  on account of higher cost of funds, some one-time write-offs (IL&FS etc.),  lower demand (especially in some part of consumer discretionary sector)   and inflated input cost that some of the large  Corporates may have  faced  during the quarter gone by. Finally,   the global uncertainties around US-China trade war can resurface once the 3 months lock-in period for the truce is over.

Notwithstanding such short-term uncertainties which we believe is transient and temporary in nature one must not read too much into it while making investment decision as he/she would then run the risk of missing wood for the trees.  The big picture for India is that massive reforms have already been implemented over the last 4 years which will start moving the wheel of economic growth slowly. But once it gathers pace then it is expected to yield  significant and sustainable economic growth  for a long period of time as  it has done to  other  developed economies  in past.

The earning cycle which has been stagnated for the last 4 years have also just started to move, albeit at a slower pace than expected. The rising rates, higher oil/ commodity prices and high NPA cycle which were the major deterrents to earnings growth in past are hopefully behind us now.  And, fresh capacity addition in the economy is around the corner as the gap between available capacity and used capacity (called output gap by the economists) is closing.

Interestingly it is worthwhile to take note that midcaps which represent the broader market and deeper India growth story are now down by more than 15% in last one year. There are some pockets of good opportunities that are now available in this space which our Fund Managers will look for investing depending on their respective fund mandates. However, the caveat to the investors is that one must keep patience in this volatile market environment. One must remember that in this long journey there would be patches of turbulence, and in such turbulent time, one has to stick to the basic rule.  Fasten the seat belt, and sit tight. A calmer sky is waiting ahead….

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