WHEN analysts start talking of India as a good long-term story for five to 10 years, that itself is indicative of what lies in store for the market in the short-medium term. May I ask them if they can predict the political landscape of the country for such a long period, never mind the economy and the financial markets? The market has run up a lot purely on sentiment coupled with a fair bit of good luck-but both elements are seen to be waning fast.
The market is gripped by both domestic and global worries that include the Chinese slowdown and escalating debt worries of Greece. The IMF has predicted a slowdown in US growth and a protracted period of low growth for the world economy. It has predicted that India’s GDP would not exceed 8 per cent right up to 2020 as against the Economic Survey forecasting it between 8.1 per cent and 8.5 per cent in the current fiscal year. It further says that oil prices have bottomed out and are set to rise from 2016 onwards.
The net profit of 100 companies for the March quarter fell 9.23 per cent-their worst performance during the last 10 quarters. Even net sales dropped 4.12 per cent. Earnings are predicted to remain low-key for another to to three quarters. Other indicators like sale of cars and FMCG too are turning dismal. Levying Minimum Alternative Tax (MAT) retrospectively on Foreign Portfolio Investors (FPIs) is hurting the sentiment for foreign investments. The rupee has declined to a month’s low against the US dollar due to capital outflows and fresh dollar demand from banks and importers. Exports declined sharply in March by more than 21 per cent-the sharpest fall in over three years and the fourth fall in as many months.
The Indian Meteorological Department has predicted below average rainfall for the year-the second consecutive poor monsoon in a row. This is after the recent unseasonal rains caused huge damage to the winter crops. Lower farm output will affect overall growth and rural demand, putting further pressure on corporate earnings. It will have fiscal and monetary implications as well since lower output will lead to higher food prices pushing up inflationary pressures. This will reduce the scope for further rate cuts by the RBI. The demand for loan waivers and higher support prices will become louder, having further fiscal and inflationary implications.
The financial sector is also disillusioned with the latest GDP numbers due to the change in methodology since the same is not getting reflected in the corporate earnings. The Modi government is facing a perception problem with a united opposition making things more difficult for the government that is yet to complete its first year in office. However, the promise of structural reforms, reduced bottlenecks and improved infrastructure, expansion of the manufacturing sector, rising GDP growth, lower inflation and interest rates and rising corporate earnings still make the Indian market attractive in comparative terms. The passage of the Goods and Services Tax Bill and permitting 15 per cent of EPFO corpus for investing in equities may amount to a whopping `90,000 crore, keeping the markets buoyant even in the event of some FIIs withdrawing.
VOL. 9, ISSUE 2 | May 2015