Post State Elections, Financial Markets Will Be Driving With Brakes On
Now that the five state elections are done and dusted, the bigger question we’re looking at is what lies ahead for India’s financial markets.
On a good day, it’s like a multiple-choice question. Unfortunately though, in this case, the answers all look like they are leading to the same conclusion. Markets will not have it easy over the next few months.
The predominant expectation is we’ve got a credit boom party coming up. A more 'amiable' governor at the Reserve Bank of India may ensure liquidity is easier and errant banks, power companies and most any other corporate that featured on the February 12 circular now gets a lot more breathing space. Time will tell in this particular case.
Also Read: After Urjit Patel Drama, RBI Must Turn Its Attention to How It Can Help India's Economy
The other big expectation is that these political results may lead to sops galore. Remember, a big reason behind the the assembly election results is that there has been a sharp fall in farmer incomes. There’s been chatter already about using the RBI’s surplus funds for a “massive” investment thrust.
There are two problems with this electoral strategy. The first is that we don’t need more schemes, we need stronger implementation and stronger consequences for defaulters. Also, as last figures showed, India’s fiscal deficit has already hit 103.9% of it’s full year target in October. This is not good news for the country certainly, and is worse news for foreign investors looking at this market and economy.
And finally, the noise around non-economic issues may rise significantly, which in turn, may further fuel nervousness within the market.
It is also unpleasant for ratings agencies that are now watching India with hawk eyes. Moody’s held back on any rating commentary but noted “while the motivation for the RBI governor’s resignation is unclear, the independence of a country’s central bank is an important consideration in our assessment of a sovereign’s institutional strength”.
Ditto for Fitch, that credits the RBI’s committed efforts at inflation targeting as a big positive and points out it is concerned at the trend it is seeing with central bank governors (first Raghuram Rajan, then Urjit Patel) making quick exits.
Quick exits of Raghuram Rajan and Urjit Patel as RBI governors is a concern. Credit: Reuters
So, as we slice and dice the big political ‘semi-final’, here are the three big takeaways for financial markets.
First, elections may come and go, but global markets are here forever. And if there’s volatility on that screen, there is no sop which can insulate our markets from global movement. Trade wars are not over, even as sentiment jumps from one tweet to the other. And when global markets shiver, everyone feels the chills.
Second, domestic investment runs the risk of slowing down. This has been a fantastic safety net for markets in the last few months and we saw the first crack in November figures for mutual funds – net inflows into equity mutual funds dropped 33% to Rs 8,414 crore for November 2018 (from Rs 12,622 crore in October 2018, an 8-month high). Negative returns on one-year SIPs in equity mutual funds may have reduced investor appetite for equity as also reduced incentive to sell MF products.
Third and most worrying, there’s no joy in growth right now. Auto numbers, GDP figures, corporate earnings, IIP numbers that play on again, off again; whichever way you slice it, the first half of next year is going to be bumpy until some of the relief from cooling crude prices start showing up.
Also Read: What Does Urjit Patel's Resignation Mean for the Future of Modi's RBI?
And fourth, the rupee may have an even tougher run ahead. It’s not as easy to prop up either sentiment or levels over here, and over the longer term, our currency has been a far more prescient “sentiment barometer” when it comes to India.
Things may well turn in the second half, which is also when the general elections will be behind us. My advice: if you want to feel brave, sign up for a bungee jumping expedition, don’t fritter your hard earned money at the stock market. Watch your investments carefully, make purchases in the safe universe of “sanitised” stocks and tune out the noise.
This will turn, but political outcomes should never feed how you invest your money.
Mitali Mukherjee is CNBC-TV18’s former markets editor.
This article went live on December thirteenth, two thousand eighteen, at thirty minutes past two in the afternoon.The Wire is now on WhatsApp. Follow our channel for sharp analysis and opinions on the latest developments.
