The visit of US President Obama, who was the Chief Guest at India’s Republic Day Parade on the 26th of January, is being taken as highly positive for India’s economy by the markets. The Sensex and Nifty closed at record highs today. The reason why markets are giving a thumbs up to the US president visit is that it sees closer economic ties between the US and India post the Obama visit.
Obama has facilitated the nuclear deal with India in his visit. India is now seen as highly strategic for the US given China’s economic and military power. Hence it suits the US to form closer economic ties with India. India on its part will open its doors to US investments as it boosts the country’s economy.
Apart from the Obama factor, the following three reasons will contribute to the Sensex and Nifty party.
- India growth forecast is relatively strong to rest of the world and is higher than China growth forecast.
- India benefits from lower oil prices aiding domestic consumption through lower inflation and interest rate cuts. Union Budget 2015-16 could give a large boost to FII sentiment if fiscal deficit targets are maintained and growth thrust is given through reforms.
- ECB bond buying will negate Fed’s anticipated rate cuts aiding capital flows into India
The IMF released its latest growth forecast on the 20th January 2015 and the theme was largely US growth, lower oil prices and China weakness. The world economic growth is revised downwards by 0.3% for this year and the next (2015,2016) with growth forecast at 3.5% and 3.7% respectively. US growth forecast is revised upwards by 0.5% and 0.3% while Euro Area growth forecast was lowered by 0.2% and 0.3%. China growth forecast was lowered by 0.3% and 0.5% to 6.8% and 6.3%.
India’s growth forecast was lowered by 0.1% for this year and maintained for next year at 6.3% and 6.5% respectively. India is expected to grow faster than China in 2016, which provides a strong boost for FII sentiments.
Oil prices tumbling by over 55% over the last one year has hit oil economies and other commodity dependent economies with forecasts revised downwards for Russia, Saudi Arabia, Brazil and regions of Middle East and Latin America. However India is seen as a beneficiary of falling oil prices as it leads to inflation coming off (CPI inflation is down to 5% levels from over 9.5% levels seen last year). RBI cut the repo rate by 25bps on the 15th of this month and is expected to cut rates further given cooling inflation expectations. Read our policy analysis “ RBI will cut rates further starting February 2015”.
Falling oil prices helps reduce India’s oil import bill as oil forms 34% of imports. India’s CAD (Current Account Deficit) will stay at lower levels of around 2% of GDP and given strong portfolio flows that is at around USD 34 billion in the April to January 2015 period, the country’s BOP (Balance of Payments) will be highly positive leading to a stable INR despite a strong USD that is up over 14% in the last one year against its majors.
Falling inflation and lower interest rates will help domestic consumption pick up and that will lend confidence for businesses to increase investments leading to sustainable growth going forward.
The Union Budget 2015-16 will be presented in Parliament at the end of February 2015. The government is keen on attracting foreign capital to push its “Make in India” concept. In order to gain confidence of foreign investors, the FM will look at reforms in tax and other laws. The FM will also keep to FRBM (Fiscal Responsibility and Budget Management) act targets for fiscal deficit at 3.6% and 3% of GDP for the next two fiscal years as RBI rate cuts are highly dependent on government’s commitment to improving its balance sheet. A reformist budget coupled with fiscal strength will add to India’s economic growth.
The Euro Area is expected to grow at 1.2% and 1.4% in 2015 and 2016 respectively, well below global growth estimates. Eurozone is facing deflation and high unemployment. Read our “Global Economic Data Analysis” for analysis on Eurozone economy. ECB is under pressure to prevent deflation and improve growth in the Eurozone and is rolling out a USD 2.3 trillion bond purchase program that will last until September 2016. “Click here to read our analysis on the ECB stimulus”
The ECB stimulus will negate the expected rate hikes of the Fed. US unemployment at multi year lows of 5.6% and strong job growth that was around 3 million in 2014 is instrumental in the Fed moving away from record low interest rates that were maintained for the last six years. Markets will have cheap Euro liquidity leading to search for yields globally. India will be a beneficiary of that liquidity. Read our Currency Market Analysis on global liquidity, currencies and capital flows.