We are concerned about growth, expectations of future rate hikes and their impact on India. How do you view Wednesday’s Fed policy?
The Fed’s rate hike is a function of the fact that inflation is far more important to the US than growth today. Not only from the perspective of the Fed, but also from the perspective of US politicians, as Senate elections are due in December. As we know, growth may not get you votes, but inflation will definitely lose you votes.
On the political side, the Joe Biden administration is also putting pressure on the Fed to lower inflation at all costs. In a demand-driven economy like the US, that can only be done by raising interest rates. When interest rates are raised, demand is dampened. Therefore, US economic growth will naturally slow and eventually slide into recession.
But from an Indian economic perspective, we’re quite decoupled from America because we don’t have too many exports to America compared to the size of our GDP. Indian economic growth will not be severely impacted by the US slowdown or a possible recession.
Certainly there are concerns, but not only has it impacted all growth-oriented sectors, but the inverted yield curve is showing signs of a recession. How can you read this? Major US voices have firmly denied that they will fall into a recession. how do you take it
Given that inflation has risen from 1.5% to 8.5% and is being caused by a mix of supply-side factors, starting with Covid and then Russia’s Ukraine war, and the demand-side factor due to the stimulus from the Fed through QE and US government stimulus by giving away $3,600 to every American taxpayer.
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I think the US growth scenario will be hurt if the Fed doesn’t act on it. The only way to get there is by raising interest rates and killing demand. In this context, with the Russia-Ukraine conflict showing no sign of ending, there is little choice but for the US to slip into recession before inflation can be brought under control. So, in my view, there is over a 75% chance of a recession in America and the advanced economies like Europe.
You mentioned the decoupling factor of India. Indian markets are showing this resilience, but now looking at the rate hike scenario along with resilient demand across sectors in the domestic market, how long can we sustain this outperformance?
I believe we have entered a space where we disconnect from the advanced world. This is because the US is suffering from an inflationary scenario, an attempt to dampen demand and lower inflation, and a recession will result in a drop in commodity prices and a drop in oil prices.
Among emerging economies, India is the only economy that imports 83% of its oil and a significant amount of commodities. In a scenario of falling commodity prices, an economy like India benefits from the falling commodity prices in several ways.
First, domestic inflation will fall due to the imported inflationary risk.
Second, our trade deficit and budget deficit will improve.
Third, the amount of dollars needed to pay for imports will decrease, which will improve the currency situation.
Fourth, the Indian corporate sector using oil-related products as inputs will also face a reduction in its input costs and an expansion in profit margin. All of these factors combine to mean that the Indian economy will benefit in a recessionary scenario in advanced economies.
Now the Indian market is also proving to be decoupled from the American markets as some Rs. 2.5 crore flowed out of funds due to the withdrawal of FIIs from India in the period between October and June. But it didn’t all go back to America. Some of the money went from the stock market to America’s debt market because higher interest rates are a good return there. Much of the money went to commodity-exporting markets like Brazil, away from India.
Now that the deflationary and recessionary scenario is looming, that money is likely to be reallocated back from the commodity export market to a commodity import market like India. FII flows will come and support the market.
The third point of view is that the Indian market has seen the strong support from domestic investors because Indian per capita income has increased even in the Covid period but people have had no opportunity to spend the money due to the lockdown. So their savings increased and more investment in the stock market was seen.
The Rs 12,000 crore SIP book offers strong support for the domestic market. In light of this, the market is also moving towards decoupling and while there may be a near-term panic reaction when the Fed rate hike is announced as some FIIs could withdraw funds within days. We will find that the reallocation of capital from commodity exporters to India as well as domestic flows will provide support and the market will recover.
I believe that India is at a sweet spot both as an economy that will benefit from a recession in an advanced country and as a market that will benefit from capital flows in a falling oil price scenario. India is currently in a very good phase. I would have felt that in the land of the blind there is a one-eyed king and that is the status of India today.
India is in a good phase and we are seeing a lot more confidence in the Indian market. In the short term, the market has become very volatile. How do we balance our equity allocation?
The scenario we have before us today, with India in a sweet spot as the world enters recession, the corporate sector is bound to post an increase in earnings per share. I believe that the macroeconomic factors are also developing positively for India; GST collections have increased month-on-month. We’ve seen a 40% year-on-year increase in income tax and a 30% year-on-year increase in corporate income tax.
All state government income streams are also on an upward trend and the government has wisely invested the money in the infrastructure program through the widening budget deficit it has been going through in Covid.
Second, through the PLI program, India is trying to capitalize on incoming FDI money and a China-plus-one strategy being implemented in certain very labor-oriented sectors. The capital goods cycle is thus stimulated. The private sector with capacity utilization exceeding the long-term average of 72% and reaching 75% means that many sectors and industries are at 80% and therefore there is a need to expand their capacity to meet demand in two to three years cover up .
This investment cycle will provide a strong boost to Indian GDP growth in the coming days and hence we will find that domestically focused companies have a good order book and margin expansion. I believe that increasing your stock allocation at this particular time is a sweet spot.
https://economictimes.indiatimes.com/markets/expert-view/in-the-land-of-the-blind-a-one-eyed-man-is-king-and-that-is-the-status-of-india-today-sunil-subramaniam/articleshow/94364383.cms Indian economy | Indian stock market: In the land of the blind, a one-eyed man is king and that is the status of India today: Sunil Subramaniam