Podcast 18th December 2015
Financial markets are eagerly awaiting the Union Budget in February 2016 and any disappointment will have severe repercussions that will affect all savers who have investments in INR assets.
US Federal Reserve (Fed) delivered the much anticipate 25bps rate hike in its policy meet that concluded on the 16th of December 2015. Fed has also guided the markets on its potential actions in 2016, which is a total of 100bps hike in rates, split into four hikes of 25bps each. Fed action uncertainty will now go out of markets.
India is seen as a bright spot amongst gloom in emerging markets that are reeling under the twin effects of China slowdown and fall in commodity prices. India is seen as a bright spot largely due to the expectations of strong reform push by the Indian government. However if the reform push does not happen, India will start losing its lustre and will witness all positive expectations being taken out from its markets including Sensex, Nifty, Ten Year Government Bond and the INR.
The weight of expectations is now on the FM, Arun Jaitley. He will be presenting his third budget to the parliament in February 2016 and this budget will have to be a blockbuster budget. Markets will not expect anything less given that the US economy is showing strength and capital will flow from weak economies to the US, given the fact that Fed will be raising interest rates in 2016.
The year 2015 has not been good for markets with INR depreciating, Sensex and Nifty staying flat and ten year government bond yield also staying flat. FII flows have been muted with equity investments negative since April 2015 to date and debt investments at just over USD 1 billion. In contrast FII flows were robust in fiscal year 2014-15 with flows of around USD 45 billion.
Markets are looking forward to a hopeful 2016 but all that depends on the budget for fiscal 2016-17. The budget has to show higher revenues to compensate for extra expenditure of 0.65% of GDP on 7th pay commission implementation payout. The key indirect tax reform, the GST (Goods and Services Tax), which was promised to be implemented in April 2016, is yet to be passed in the parliament.
In fact apart from raising indirect taxes in the last budget there has not been any significant move to increase revenues for the government. Direct tax collections are likely to fall short by Rs 300 to Rs 400 billion and this will further strain government finances
Commercial banks especially state owned banks that account for over Rs 90 trillion of the country’s savings are struggling with bad loans and have almost stopped extending credit. Lending rates are not coming off despite a 125 bps rate cut by the RBI in calendar year 2015. Economic growth will not come through if investments do not grow and for investments to grow, banks have to start lending. Banking sector reforms are critical if the economy has to grow.
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