Markets ahead of Performance


The Indian Stock Markets have run up in a huge fashion over the past 6 months based on the euphoria created by the elections and the new government of Mr Modi.

Is it justified ?

Partially may be – but not to the extent of over 27.8% in 8 months (from April 2014 to Nov 2014), attaining the position of the best performing stock market in all of Asia Pacific and the second best in the entire world.

Simply because the actual performance of the government is yet to be seen. Yes, the inflation has come under control and trade deficit appears to be improving. Yes, promised decisions on insurance FDI (Foreign Direct Investment holding) and taxes appear to be on their way in parliament (not yet a done deal).

Any reform that the government wants to implement will be challenged in the upper house of the parliament by the opposition parties, even if it can get through the lower house which is now controlled by the ruling party.

The most important indicator was the GDP growth. It has dropped to 5.3% in Q2, from 5.7% in Q1.

But the BSE Sensex stock market rose by 255 points last week Friday. Obviously there were external considerations, the key factor being the dropping oil prices which benefited the stocks of oil companies.

The conclusion that one can derive from an analysis of market behavior and government performance is that, as usual, the markets are way ahead of physical realities of India. The global investors are watching and waiting – the portfolio investment inflows are only half of what India received in 2010. It does not matter if the Indian stock market is the best performing in the world, if government fails to deliver on its committed reforms and people do not benefit at the end of the first year of the new government.

It is critical for investors to understand that without the much-needed reforms and tax changes, India will continue to be a difficult place to do business in and business with. Land acquisition reforms are absolutely critical to ensure some success of the “make in India” slogan of the Prime Minister.

India still suffers from high interest rates, and the government and the Reserve Bank of India (RBI) do not seem to be in sync on interest rate policy. High rates are choking credit growth for the industry and for the consumers. RBI’s worry is inflation, but that being contained now, it is time to relax a bit and drop the rates. Of course, that action will further boost the already high stock indices, but more importantly will reduce the cost of doing business.

Overall, I would expect the stock markets to correct somewhat in the next couple of months if the RBI does not reduce the interest rates. And more so, if the government fails to pass reform bills in the Winter session of the parliament which is currently going on.

Let us see how things unfold.

Cheers,

Vijay Srinivasan
30th November 2014

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