Feels good

With most macro indicators pointing to improvement, it is up to the market regulator to ensure the sanctity of the market

CY 2018 has begun on a cheerful note. Benchmarks are hitting new highs. The projections of India’s growth by multilateral agencies are optimistic. World Bank sees GDP expanding 6.7% and the United Nations at 7.1% in CY 2017 than the 6.5% estimate for FY 2018 of our Central Statistical Organization. After a six-month pause since the roll-out of the goods and services tax, reforms are back on track. Government approval will not be required for 100% FDI in single-brand retail.  Public sector banks are being recapitalized. The merger of SBI and associate banks has set in motion the consolidation process in the banking sector. Eventually, only a dozen or so PSBs will remain. Brimming with demo liquidity, banks are reducing their cost of borrowing by cutting deposit rates. Credit growth looked up in November, though on a low base caused by the recall of high value notes a year ago. Foreign exchange reserves have climbed up to over US$ 400 billion, the highest-ever. Foreign investors bought over Rs 148000-crore debt in the last calendar year as against a net pullout of Rs 43400 crore in CY 2016. Equity exposure of these investors is up three times over the year. Mutual fund inflows in stocks more than doubled over the period. There is unlikely to be a flight of capital, with the Federal Reserve dithering over rate ramp-up in the current CY as inflation in the US is still soft. Yet the rupee can be expected to decline moderately from the CY 2017 level as the import bill goes up to meet a resurgent economy as well as due to surging crude oil prices. Fuel prices can come down if brought under GST. There is determination to make GST user-friendly. A slighter weaker rupee might have the ability to boost exports, down by half in December over November.

The index to measure services activity crossed over to expansion from contraction and that of manufacturing improved to 54.7 from 52.6 in December over November, indicating that the worst might be over. Industrial production surged at a 25-month high pace of 8.4% in November 2017 over November 2016. Manufacturing hit a record high growth. Capital goods posted the fourth consecutive positive expansion. The infrastructure and construction sector spurted a sharp 13.5%. Net direct taxes grew 18.2% in April-December 2017, meeting over two-thirds of the target for the current fiscal. The buoyancy in tax collection has resulted in reassessment of the government’s borrowing program. Now only Rs 20000 crore will be required, down from Rs 50000 crore estimated earlier. Consequently, fears of increase in interest rates going ahead have subsided. Most likely the fiscal deficit will remain at 3.2% of the GDP for the current financial year. As a result, the fall in bond prices has been capped, offering huge relief to banks. Companies are reducing debt. Distressed assets are getting buyers. Transparency in real estate and interest subvention on first-home loans are bringing back buyers. With the buyout of HPCL by ONGC, the Rs 65000-crore disinvestment target for the current fiscal year has been crossed. The Niti Aygoy has recommended 22 PSUs for privatization.

The spurt in consumer prices to a 17-month high of 5.21% in December 2017 over a year ago due to increase in core inflation should cause satisfaction rather than alarm. The heating suggests pick-up in demand after the cold wave stemming from demo and GST. Yet the cumulative CPI inflation is lower at 3.25% in April-December 2017 compared with 4.85% in April-December 2016.  Also, wholesale prices are at a three-month low on softer prices of vegetables, pulses, egg, meat and fish. What can puncture the feel-good mood? Inability to maintain the market’s sanctity is a looming danger. Despite injecting significant transparency in trading and imposing accountability on issuers and intermediaries, the regulatory framework in India is a work in progress. The reminder of the fact was the market regulator’s decision to put off disclosure of domestic and international debt default by listed companies after making it mandatory in August. It seems the Reserve Bank of India is not comfortable with the information coming in public domain. The equity and bond markets often anticipate problems even before they occur. Better to let companies reveal than have stocks fluctuate on rumors. The concern of insider trading is real, particularly in the digital age. Shares of a financial services company went up 15% in a week before it announced merger with a new-age private sector bank. Another private sector bank’s quarterly results were leaked on WhatsApp groups days ahead of their dissemination. Unless a crackdown is visible in such instances, investors might hesitate to enter the market despite favorable tailwinds.

-Mohan Sule