Pre-election, the market has rallied on hope…

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Recession is the key subject being discussed in the global market today. Global bond yield, oil prices and economic data show a slowdown in the world economy. The financial market has turned cautious reviewing such data, a situation which the world market has not seen in the last 10 years. IMF in its latest update, has cut the world economy’s forecast further, third time in six months, to 3.3% in 2019 from 3.6% in 2018 due to trade tensions and chaotic Brexit. IMF expects growth to revise in 2020 to 3.6%. This does not forecast a recession but rather a slowdown, which is also well-accepted and measured by the world central banks. This is supported by reduction in interest rate and increase in liquidity. It is unlikely to be a dire state of affair for emerging market like India which is bound to improve its economic activities post FY19.

The NPA level in the domestic economy has reduced from 11.5% in March 2018 to 10.8% in September 2018, and it is expected to decline to 10.3% in March 2019. This is an ongoing process and will provide the needed push to the humongous size of total Rs12.2lac cr projects stuck in India, which will help in restarting the private spending in the coming years. However, there can be a temporary delay in the resolution process given the recent Supreme Court order regarding February 12th RBI circular.

RBI’s decision was largely in-line with expectation, but with a surprise that the rate cut decision was not a complete consensus with as the MPC voting 4:2 in favour of a rate cut. We don’t expect a rate cut in the next policy, but we still continue to believe that there is a scope for further cut in repo rate from 25 to 50bps in the next three to four policy meetings. This is supported by a weaker economy, inflation and reduction in global bond yield. We expect this weak economy to improve from Q2FY20 onwards. However, one needs to keep a close watch on the upcoming poll results, possibility of fiscal slippages, effect of El Niño, and crude prices.  A downward revision in GDP forecast from 7.4% to 7.2% was a proactive action of RBI, not completely expected by the market though it was a known fact that economy is slowing down as per the latest domestic and global data. We do not expect this to further impact the market and do not consider this to be a setback as it is supported by reduction in inflation forecast and interest rate with room for more cuts in the future, unless there are additional setbacks in global and domestic developments.

The market is hoping for a continuity in reforms and measures implemented by the last government. A fragile hung parliament will be a big risk for the domestic market impacting the premium valuation of India compared to other emerging markets. Government policy, decision taking ability, measures and spending can get delayed impacting the earnings growth expectation of the market. The market is hoping for the best based on distinct advantage shown by few pre-poll election survey.

Posted: April 11, 2019

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