Indian
Stock Market has come off sharply in last couple of month owing to poor
economic data, political uncertainty and global financial instability. While GDP
for Q3 FY2013 came in at its decade low of 4.5%, at the same time, a higher
inflation has tied RBI hands to ease monetary policy. As a result, price of
rupee is going down against dollar which is putting further pressure on our
twin deficits.
While
on one hand Government has shown some resolve to tackle the bulging subsidy
burden by partial decontrol of diesel, on the other hand, in a populist
measure, it has cleared an ambitious food-security bill that would allow 67% of
the population access to cheap food gains.
Now
with the withdrawal of DMK from UPA 2, chances are that we may still get an
election in late 2013 which mean that Government has all of 6-9 months to get
its house in order. Expectedly, the news sent shockwaves in the markets which
fell off sharply despite a rate cut by RBI on the same day. While chances of an
immediate election seems remote considering that most of the parties are
unprepared, one still cannot rule out the possibility especially since the
Government stability now depends upon ever fluctuating SP and BSP.
However,
what’s more worrying for the market is the fact that if ruling party i.e.
Congress now decides to go into election mode, there may be a slew of populist
measures which may put the economic prudence in jeopardy. Also, no party
appears to emerge stronger in the recent years and chances are that we may get
a fractured mandate in next Lok Sabha election as well which may lead to some
volatility in stock markets.
The
effect of political risk is also on Capital Flows. So far India has received
decent capital flows despite the cracks in the current account deficit, which is expected to top 6% of GDP
for the third quarter of this fiscal year. The government has made many reform
promises and targeted an ambitious 4.8% of gross domestic product (GDP) fiscal
deficit for the next fiscal year. Any increase in uncertainty will cause the
capital flows to run off the country. In the worst case scenario of early
elections, there could even be some outflows in the near term. That, in turn,
will have a unbearable effect on the rupee, setting off a vicious cycle of an
increasing current account deficit and depreciating currency.
Conclusion
While withdrawal of support by DMK has definitely raised doubts
about the fate of the government's economic reforms agenda, the statement by
Finance Minister implies that Government may still continue with its drive as
that is that only way they can prevent a rating downgrade and salvage some of
the lost ground of preceding 3 years. Also, stock markets will be keenly
watching the action on the sidelines for any signs of stability or shakiness
which will determine future direction for markets.
By Ruchita Gajjar– Research Associate – Concept Securities Private Limited
