Murphy’s law states
that "Anything that can go
wrong, will go wrong". This seems especially true in the context of
Indian economy and Indian equity markets in the last one year. Last year this
time, India was grappling with an imminent sovereign downgrade with an uncontrolled
fiscal deficit, policy paralysis of the highest order with no economic reforms for
eight long years and a weakening rupee. With Mr. Chidambaram coming back to the
finance ministry, measures were announced to tackle the fiscal situation. We
saw government spending being curtailed, FDI allowed in several sectors like
Retail & Aviation and a more benign monetary policy. Several policy measures were undertaken to cap
fiscal deficit. The fuel price deregulation announce in January is probably the
most significant reform measure in the last five years and will have
significant positive long term impact on the economy. This combined with severe
expenditure curtailment lead to a better than expected fiscal deficit number
for FY13. With RBI easing monetary policy, it was expected that GDP growth will
revive, although slowly, from the 5% levels of last year. And just when things
seemed to be looking up, we had an 8% fall in rupee value through the month of
May and June which changes the overall macro picture.
India
is not alone in the currency carnage which was triggered, party, by US Federal
Reserve’s comments on tapering on Quantitative easing. However, India is most
vulnerable due to the high deficit levels on both fiscal and current account.
RBI has been forced to intervene and carry out monetary tightening to defend
the rupee. These monetary policy measures are going to slow down economic
activity further and a recovery is now pushed back into 2014. We are now
expecting a GDP growth of around 5% for the fiscal. Equity markets have reacted
with banking and auto stocks taking a big hit. However, the broader market has
been resilient with BSE Sensex with 5% of its all time high. We believe that
all possible negatives which could happen have played out. One can add a fractured
electoral outcome as another potential negative. However, no one is expecting very
decisive mandate from elections next year so expectations are already low. There
is not much that can go wrong from here. We have GDP growth, currency, Current
account deficit, all at a decadal low. Things can only look up. Growth should
get a boost once these temporary measures by RBI are withdrawn. We see more
actions on the import side which will also help stabilize the rupee.
It’s
difficult to see the sunshine when dark clouds gather. A good monsoon, commodity
price correction, a strong macroeconomic recovery in US & a stable Euro
area are significant positives for equity markets this year. We expect things to incrementally get better from here.
