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Global Turmoil Pulls India Down; GDP Optimism Ignored

Global markets continued to remain edgy and volatile with Japanese stocks collapsing more than 5 per cent and its bond yields plunging to below zero even as markets across North-East to South East Asia, including China took a breather for Lunar New Year

Global markets continued to remain edgy and volatile with Japanese stocks collapsing more than 5 per cent and its bond yields plunging to below zero even as markets across North-East to South East Asia, including China took a breather for Lunar New Year.

Overnight dip in values across Europe and US set the tone for Asia-Pacific and the Sensex opened 350 points lower before recovering slightly to hover around 24,000. Around the same time last year the benchmark was higher than 30,000 points.

Japanese 10-year bond yield has declined from its December level of 0.30 percent, and fell sharply since 0.23 percent level in the last week of January when Bank of Japan introduced a zero interest rate policy. Following the global turmoil and drop in local rates the Japanese yen gained to its strongest since 2014.

A messier scenario was spared as markets in China, Hong Kong, South Korea, Malaysia, Singapore and Taiwan are closed for the New Year.

Dow Jones Industrial Average and Nasdaq fell last night 1.1 per cent and 1.8 per cent respectively. Sensing a prolonged global economic uncertainty and volatility with crude oil plunging yet again below $30 per barrel, investors are shifting to buying gold for safety. The yellow metal has gained about 15 percent from December 3 lows to $1,200 per ounce.

Adding to the gloom is the slow recovery of U.S economy, prompting concerns of next increase in interest rates by the US Federal Reserve, employment and inflation. Some experts are already beginning to speculate of possibility of a recession in the US.

While the Indian economy stood out tall as the fastest growing major economy ahead of China, lack of clarity from the authorities is leading to some questions being raised about the credibility of GDP figures and its full year forecast. Growth figures look higher partly because of revised GDP series.

"Overall, the data indicate that growth has been primarily driven by private consumption and a positive boost from net exports, even as investment growth slowed," said Sonal Varma and Neha Saraf, economists at Nomura Financial Advisory and Securities India. "However, the significant pickup in manufacturing sector GVA appears a tad inconsistent with currently low production and capacity utilisation in the manufacturing sector."

We expect a gradual recovery boosted by higher real disposable income (low inflation, income boost from the seventh pay commission), improving corporate profitability (low commodity prices) and higher investment funded by public institutions, Nomura economists said.

While banks such as ICICI Bank, State Bank of India, are on the way to more than one-third drop over last year, Axis Bank has lost more than a quarter. Punjab National Bank, the second biggest state –run lender, has lost half its value.

Today’s slide so far is led by Tata Consultancy Services, Infosys Technologies, and Tata Motors, all of which get more than three fourths of their revenue from overseas income. The outlook for increase in domestic growth too remains subdued.

Says Dhananjay Sinha, head of institutional research at Emkay Global "GDP data release reflect that the growth dynamics in India or abroad has not improved due to weak demand conditions. Continued decline in export growth coupled with domestic restraints such as fiscal tightness, rising NPAs, low private investment sentiment precludes a quick turnaround in the economy in the near term."

"We believe, the positive delta to growth will come if government undertakes counter cyclical fiscal expansion which is likely to be consumption oriented. Private consumption is likely to be the main driver to the growth in FY17," said Sinha in his note. "Given that the government has already committed for 7th pay commission, rising expenditure on back of impending seven state elections and unlikely sustenance of benefits from lower commodity price and higher tax rates in FY17 there is a high possibility that fiscal management may become challenging."

Will Finance Minister Arun Jaitley relax the fiscal deficit target, and increase spending to give the economy a much needed boost? Watch this space.


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