There is hope that the weakening domestic market will be supported through fiscal and monetary measures. RBI has started its fiscal measures by cutting repo rate three times in the last three policy meets. And the expectation is that two more rate cuts are likely to happen during the year, totaling 50bps. In terms of other measures, RBI has already injected liquidity of Rs1.5lac cr during the year using open market operation (OMO) and is likely to infuse an additional Rs 12,500 crore on June 20th into the financial system through the purchase of government bonds. While internationally, FED has changed its stance on interest rate hike to neutral and is likely to turn accommodative in the latter part of the year. EU is looking for new ways to push liquidity in the second wave of quantitative easing by cutting interest rate in spite of it being so low. The current 10 year yield of Euro area stands at -0.2% and EU is also looking at fresh round of bond purchase.
In terms of fiscal support, the domestic market is waiting for measures from the new government. Post the overwhelming election result, equity market shifted its focus to the gloomy domestic and international economic data. The pre-election rally was positive with key indices like Nifty50 and Nifty Small caps registering a 10% return in three months. However, it was not sustainable due to lack of clarity of the upcoming measures. Thus, hope is being tested today due to weak economic and monsoon data. Market may have to wait until the Union Budget which could be the testimony of the new plans.
Globally, trade war is impacting the market which has got murkier during the year. Equity performance of important economies like China, South Africa, Mexico, South Korea and Europe are bad with an average return of -11% in a year, while the US market has been flattish with volatility. But India has been positive with 10% return YoY. The market always had a hope that economy will benefit from the previous reforms and that the new reforms to be initiated will accelerate growth and increase private investment. Hence the market was always on premium valuation. The world views India as an upcoming economy led by internal growth, isolating itself from the ongoing trade tension with possible gains.
As per the latest study by Ministry of Commerce and Industry, India is likely to benefit from the US-China trade war by exporting more to both the countries. It may open opportunities for India to boost exports of over 350 products. Around 151 domestic products including diesel, X-ray tubes and certain chemicals have an outright advantage to replace the US exports to China. Similarly, 203 Indian goods like rubber and graphite electrodes have the advantage to replace Chinese exports to the US. Increasing exports would help India narrow the widening trade deficit with China, which stood at USD 50.12 billion during April-February 2018-19, the study noted.
Posted: June 19,2019