Domestic economy is on a path of revival, this is after last year’s trough. India’s GDP is likely to touch a bottom of 7% in FY19. This slowdown was due to lower spending by government on account of tightened revenue collection after numerous reforms which led to managing its deficit situation. At the same time private spending was low due to NPA problem and slowdown in world economy. On the other hand, auto sector is continuously witnessing sluggish demand in the last 2 quarters, which is expected to continue for a few more quarters leading to production cut by major OEMs due to higher inventory and lower liquidity. However, GDP growth is likely to improve to 7.4% in FY20 in expectation of restart of government spending post national election and stability over fiscal deficit.
The NPA problem has reduced from 11.5% in March 2018 to 10.8% in September 2018, and is expected to further decline to 10.3% in March 2019, this process is ongoing and will provide a real effect on the humongous size of stuck project in India, it will affect the restart of private spending in the coming years. In a nutshell, the domestic economy is likely to improve in FY20 compared to the subdued FY19.
Another important tailwind for emerging markets like India is ease in interest rates in CY2019. Along with that, world central banks like FED is also likely to stop reversal of Quantitative Easing, buying back of bonds issued post the global crisis. Both these factors will improve the liquidity position, positive for rest of the world economy.
It will generate an opportunity in emerging and developing market to cut interest rates in their domestic economy, a positive factor in India given the slow economy and inflation. There is some fear in the world that global market can swing into a recession which has not bared such situations for a long-term since 2008, world economy has been euphoric since then. What seems most likely is that rather than a recession it is likely to be a case of slowdown in growth. This situation will be well managed by reduction in cost of funds and the trade-war deal. The US 10-year bond yield has reduced to 2.37% from 3.26% of 52-weeks high.
During the last one month India is outperforming the emerging market by 9.1%, the rally was broad based led by realty, power, banks. However, the performance of IT and Auto index were subdued due to strong rupee and insipid demand. The focus has shifted to mid & small caps, where valuation looks attractive. The liquidity situation is likely to improve supported by strong FIIs inflow and RBIs continued Open Market Operation. We expect India to continue its out-performance among emerging markets in expectation of revival in earnings growth and political stability.