Wall Street is rallying as U.S. equities touched record highs led by gains in energy and tech. Greater merger activity contributed to gains in the U.S. equity markets. Moreover, oil prices touched record highs owing to tensions in Saudi Arabia and reduction in production, leading to gains in energy shares. Strength in Wall Street and greater global optimism provided support to India equities.
Economic Fundamentals
The Reserve Bank of India (RBI) kept the interest rate unchanged at 6% in its October monetary policy meeting, owing to fears of rising inflation. Moreover, the RBI cut its economic growth forecast for fiscal 2018 to 6.7% from 7.3%.
India’s GDP grew 5.7% annually in the April-June quarter of 2017, a three-year low, owing to headwinds related to prime minister Narendra Modi’s demonetization move in November and the introduction of a major tax reform in the form of Goods and Service Tax (GST). World Bank reduced India’s GDP growth forecast to 7% for 2017-18 from its earlier forecast of 7.2%.
Modi’s plans of injecting cash into state-run banks saddled with bad loans are expected to lead to a boom in foreign investment. Cumulative foreign direct investment (FDI) into India reached $114.4 billion in the last two financial years of 2015-16 and 2016-17 compared with $81.8 billion in the 2011-2014 period, per a livemint article citing a latest report by KPMG.
What Lies Ahead?
Markets are scaling new highs. This is primarily because of India’s growing appeal as a business destination. In the latest World Bank rankings, India jumped 30 positions to 100th in terms of ease of doing business. This is also expected to boost FDI.
Greater optimism relating to fiscal Q2 earnings has also led to gains in the Indian equity markets. Consumer prices increased 3.28% year over year in September compared with a Bloomberg survey forecast of 3.53%. The markets expect the RBI to cut rates in its December policy meeting in order to revive growth. In a recent development, the country’s largest lender, State Bank of India (SBI), cut its marginal cost-based lending rates (MCLR) by 5 basis points.
