The road ahead for Indian markets

May 11, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

The past few weeks have been agonising for both Indian and global markets. Some consensus trades have reversed and reversed quickly.

Indian markets, which rose 28 percent in the 12 months to April 2015, have fallen 9 percent since March 1 this year.

On the global front, German Bund yields have climbed 50 basis points in the past four weeks, while U.S. treasury yields rose by 25 basis points in six weeks. Both sparked a sell-off in risky assets.

Crude oil, which fell 48 percent in the last financial year, has also risen 15 percent in six weeks since April 1. A hypothesis floating around is that the long crude may have resulted in short India.

Adding to the markets’ woes, FIIs have sold some $2 billion worth of Indian stocks in the last 11 trading sessions due to retrospective tax claims against foreign investors by the government. A few of those FIIs have gone to court over the demand, and the government has set up a high-level committee to suggest ways to resolve the issue.

The long-term impact over the minimum alternate tax (MAT) demand is not clear. It might prompt FIIs to think twice about pouring funds into India, although it is also highly likely that India’s strong growth outlook compared with many of its peers might still attract them.

The rupee, to which FII returns are immensely sensitive, hit a 20-month low of 64.23 per dollar on Thursday, depreciating 3.30 percent from April 1. The currency’s sharp depreciation will not only exacerbate outflows but may also put a dampener on the expected rate cut by the RBI in its June 2 policy review.

A falling rupee may also put pressure on the current account deficit, especially in light of resurgent crude oil prices, and lead to inflation. In the absence of any intervention, the rupee could slide further towards 65, although the new normal range could be 63-64.

Although the top three global credit rating agencies gave their ‘thumbs-up’ to PM Narendra Modi’s reform agenda, the investor community is fretting over the slow pace of reforms on the ground.

One way the government can perk up the investment community is by getting key bills like the land acquisition bill, real estate regulatory bill and GST amendment bill passed in parliament in a time-bound manner.

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