Charting the course of shaky markets
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The global economic environment remains weak but most global equity indices, excluding China have delivered positive returns ranging from 4 per cent to 30 per cent (CYTD). The reason for positive returns is mainly the government policy action across world markets. Till May 2012, Indian equity market was punished severally due to policy logjam, lack of governance, high current account and fiscal deficit, unfriendly investor policies, tax issues and many such reasons.
However, post August, India joined the global market club of supporting the economy by making many policy announcements. Surely, that was the need of the hour as without it there was a strong possibility of sovereign rating downgrade by the credit rating agencies.
In fact, the danger of downgrade became a blessing in disguise as it was that fear which acted as a major trigger for the government to take a few bold steps and helped it to change investors' sentiments and hopefully of the industrialists.
While we believe that it will take a long time for the first round of reforms to get reflected in reality, it has surely changed the sentiment towards the Indian market which gets reflected in sharp currency appreciation from INR/USD 56 to 53 levels and a huge inflow of $3 billion in just 30 days. These recent measures taken by the government will help it to reduce fiscal deficit from anticipated 6 per cent+ to 5.3-5.4 per cent of GDP.
We believe that the government has still much more ammunition — Goods and Service tax, Direct Taxes Code, removal of short-term capital gains tax, removal of retrospective taxes, auction of 2G Spectrums, etc to revive the economy. After reversing negative sentiment of investors, we think that government will now focus on reviving the sentiment of industrialists while simultaneously keeping investors positive sentiment intact. The recent government policy action can lead to more accommodative monetary policy and we think that there is a scope of 100 bps rate cut over the next six months, as commodities price pressure is moderate and fiscal deficit reduces. Reduction in interest rate will surely help the industry profitability.
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