 "Market rally driven by sentiment alone")
Indian markets are riding on little more than a hope and a prayer. The name of this hope is Narendra Modi, BJP’s prime ministerial candidate who has support of both domestic and foreign investors. With every rally, the market seems to believe that Modi is gaining ground and the BJP may do better than what most opinion polls suggested a few months ago. Apart from this, the other good thing that has helped sentiment turn is the currency’s stabilization after the Federal Reserve in the US decided to defer the rollback of its stimulus programme, also known as quantitative easing. No doubt the RBI’s move to to reduce hedging costs for FCNR deposits has helped raise $7 billion so far, analysts believe that these measures may not help much once the taper actually starts sometime in 2014. Emerging markets may face outflows, which will again weigh on the rupee.
Other than these two major sentiment boosters, things remain largely as grim for India. All macro-economic indicators continue to flash amber if not red. For starters, global agencies continue to downgrade India’s economic growth estimates. The Asian Development Bank, IMF and the World Bank have cut the growth estimates for FY14 after a very dismal performance in the first half of the year. Also, any expectations of a pick up are now looking very dim. Economists expect further downgrades going forward as lead indicators don’t suggest any improvement.
Industrial growth has crashed to a 22 year low in FY14 as demand remains weak in India and overseas. The trade deficit is showing promising signs of coming down from elevated levels on lower gold imports. Economists now expect the current account deficit for FY14 to be closer to 3.2% from over 4% levels.
Despite this improvement, growth continues to be held ransom by inflationary pressures. With September’s WPI coming in at 6.5%, the battle against prices will continue to take precedence over growth.
More From This Section
Even though the current account deficit may be seemingly under control, fresh concerns on the fiscal deficit have emerged. Tirthankar Patnaik of Religare Institutional Research says after the recent surge in crude prices and Food Security Bill coming through, the subsidy burden is expected to overshoot the government’s target for the fiscal. This, along with lower tax offtake, could pose upside risks to the government’s fiscal target of 4.8% for FY14. Religare expects fiscal deficit to come in at 5.2% of GDP for FY14, as it factors in more realistic revenue and expenditure figures.