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    4 Years Of Modi Govt: Ordinary Returns For Investors, Macros May Deteriorate


    There was much hype and the hoopla created in the stock markets, after the Narendra Modi government secured a massive mandate from the people.

    The stock markets rallied and rallied, quite a bit. It's 4 years since, and the benchmark indices have gained about 40 per cent. That's an average return of 10 per cent each ear.

    4 Years Of Modi Govt: Ordinary Returns For Investors, Macros May Deteriorate
    Four years ago, bank interest rates themselves were ruling at 8 to 9 percent and with quarterly compounding, you would have ended with almost similar returns to the benchmark indices.

    Macros may get worse with falling rupee and crude oil

    Fiscal deficit is likely to rise for 2018-19 and the current account deficit may widen, if crude keeps rising and the rupee keeps falling. Consumer Price Inflation for April has come in surprisingly higher at 4.58 per cent.

    In fact, the macros are likely to get worse with rising crude oil and a falling rupee. Petrol price has now hit Rs 85.65 in the city of Mumbai, up from Rs 82.79 seen on May 15. A near, Rs 3 increase in 10-days has been unheard off in the past. 

    This is likely to force the government to cut excise duties. If it does, it faces the prospects of a deterioration in the fiscal deficit. If it does not, it faces a backlash from consumers, especially ahead of elections in key states.

    Rising crude, is also likely to push the rupee lower, as oil imports costs soar. Foreign Portfolio Investors have been consistently pulling money out of the Indian markets, which is further dragging the rupee lower.

    To compound misery, bond yields in India and abroad are rising. US Bond yields have now touched 3.1 per cent and with more interest rates likely from the Fed, we are looking at higher yields. These means there could be outflows from the capital markets, further putting pressure on the rupee. Remember, when bond yields rise, FPIs may dump stocks and bond in India, to chase higher yields in the US.


    Inflation has begun creeping in, with the April CPI number at 4.58 per cent, as against an anticipated 4.4 per cent. This means the RBI may look at the possibility of an interest rate hike in August this year. This would be the first time in many years, that we are seeing an interest rate hike.

    An interest rate hike, will make borrowing costs higher and hence a slowdown in lending.

    The banking industry, which is the engine for propelling growth are saddled with mounting non performing assets, ensuring that they are capital starved.

    In fact, gross NPAs of public sector banks on December 31, 2017 were a staggering Rs 7.77 lakh crore. With the banking sector in a mess, one is not sure, how growth could be further propelled.

    As thing stand, four years down the line, it's looking tough. Of course, we cannot blame the government squarely for it, given the fact that it has little control over some thing like how crude prices behave. Having said that, it does have control over several other things. 

    Read more about: economy narendra modi
    Story first published: Friday, May 25, 2018, 9:09 [IST]
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