The Indian economy would face serious global and domestic headwinds in the current financial year. High crude oil prices leading to high fiscal and current account deficits, slower-than-budgeted growth, slowing European and Chinese economies and below-trend growth in the US would keep pressure on India’s economic growth. At the same time, high interest rates in India would keep putting pressure on the consumption and investment cycle. Even if the Reserve Bank of India (RBI) decides to cut rates, which can, at best, be gradual in nature, given current inflation and current account deficit trajectory, we do not see meaningful pick-up in the business environment in the first half of the financial year.
At this stage, it is difficult to assume that even if RBI would cut the repo and reverse repo rates, interest rates in the economy would come down meaningfully, given the heavy government borrowing programme. There is certainly going to be a crowding-out effect and this would not let corporates cut their interest cost in a meaningful manner. The government has not taken any initiatives for cost reduction. The only change is the shift of focus towards revenue maximisation. However, in a slow global and domestic growth environment, taxing corporates and individuals would not give the desired results.
India’s political environment is seeing a structural shift and regional political parties are gaining strength over national parties. In this environment of coalition politics, desired policy initiatives like oil sector and retail sector reforms would be missing and there would be a bias towards a populist approach, which may not be in the best interest of the nation.
The rupee depreciation is another factor that would hamper growth. Being a current account deficit country, India would need flow of foreign capital to sustain its growth. Since India's exports depend upon global growth, which is fragile, and the country's imports being inelastic, the current set-up of slow global growth and high crude prices do not auger well for its trade balance and this would lead to depreciation of the rupee. In such an environment, foreign institutional investor investment flow into debt and equity markets would be difficult.
Global liquidity can be a short-term solution for the market but growth has to pick up for its sustained performance, which in our sense, takes time. Hence, with the current macro-economic set-up, a meaningful upside in the markets is ruled out.
In such an environment, Indian markets would trade at a discount to its long-term averages. We are carefully watching for change in some of these variables, in favour of India, to convince ourselves that the tide has turned in our favour.
The author is chief investment officer, IDBI Federal Life Insurance
