The Indian Markets have been factoring a return back of the NDA and allies led by BJP (Bhartiya Janta Party). That would mean that Mr. Narendra Modi will become the Prime Minister of India again.
Will the markets stage a rally than? May be not.
There are other very important factors which we need to watch out for? These are
US Federal Reserve maintained status quo on interest rates in its 19-20 March meeting and is unlikely to go for a rate hike in 2019.
This has brought back FII money into India, which as a result has sent Sensex, Nifty and Rupee soaring in March.
Will the markets stage a rally than? May be not.
There are other very important factors which we need to watch out for? These are
- Crude Oil Prices; and
- Interest rates In the US
Crude OIL
It is important to understand that impact that Crude Oil Prices have on Indian Economy and in turn on ones investments.
Every USD 10 increase in per barrel cost of Crude Oil leads to a 0.55% increase in the current account deficit of India. India imports 75% of its crude oil demand. It is one of the largest importers of crude oil in the world.
Therefore a fall in the Crude Oil prices will have a positive impact on India's current account deficit (CAD) (i.e. CAD will become lower) and vice versa.
A lower CAD will mean reduced stress on foreign currency outflows. This in turn may lead to rupee appreciation. If the value of rupee appreciates, then imports become cheaper.
Companies like tyre, lubricants, logistics, footwear, refinery and airlines hugely depend on crude oil prices. Further companies Loke paints too will benefit from reduced crude oil prices.
Further increase in crude oil prices will increase the cost of transportation. This is turn will increase inflation. According to studies every USD 10 increase in per barrel cost of Crude Oil increase the CPI (Consumer Price Index) Inflation by 0.33%. On the other hand a fall in crude prices will Lowe the inflation. A lower inflation is perceived positively by the stock markets.
Do remember that crude prices have corrected significantly since October 2018. A significant reduction in crude oil prices has has a positive impact on our stock markets.
Interest Rates in the US
US Federal Reserve maintained status quo on interest rates in its 19-20 March meeting and is unlikely to go for a rate hike in 2019.
This has brought back FII money into India, which as a result has sent Sensex, Nifty and Rupee soaring in March.
In the aftermath of the 2008 financial crisis, the US Federal Reserve had decided to print a lot of money in order to bring down interest rates. The idea was to run an easy-money policy to encourage people to borrow and consume, and encourage corporations to borrow and expand. This happened to some extent. But the easy-money policy encouraged big institutional investors to borrow money in dollars at low interest rates and invest it in financial markets all over the world. By raising interest rates, the Fed wanted to reverse this easy-money policy.
Between December 2016 and December 2018, FOMC raised interest rates eight times, including four times in 2018 alone. This made it difficult for foreign institutional investors (FIIs) to use the easy-money policy of borrowing money in the US and investing it in India. Thus in 2018 on net basis FIIs were sellers in the Indian Equity and Debt Markets.
In March 2019 - since the time US Fed Reserve has indicated that it may not increase the rates this year, FIIs have been buyers of the Indian Equity and Debt Markets. This has resulted in the Indian Equity Markets rising by 6.3% in March 2019 alone.
However as the US economy continues to do well, the inflation risk will surface sometime and the US fed will be forced to increase rates - to control inflation. This then becomes a risk for the Indian market. An increase in US interest rates will mean outflow of monies from markets like India,
These two - namely crude oil prices and US interest rates then become perhaps as important a factor for the Indian Equity markets as Mr. Modi coming back to power.
After all economics is as important as politics.
(Disclaimer : Fir information purposes only)
