Unfavourable domestic cues hurt risk-uptake - DBS Asian Currency Research

A positive start to the week fizzled out on Tuesday, as the Indian markets were unable to capitalise on the broader improvement in risk sentiments. In re­cent months, the equity index has returned almost all of the post-election gains since 2Q14. SENSEX closed down 1.5% as index nears the 23k mark. Foreign eq­uity outflows drove the currency back towards two-year lows, checked only by suspected authorities' presence.

A bunch of unfavourable domestic cues were largely responsible for this under­performance, including concerns over the upcoming budget parliamentary ses­sion, deterioration in domestic banks' asset quality and, at the margin, news of an oil output freeze by selected oil-producing nations.

Ahead of the FY16/17 Union budget due later this month, the budget parliamen­tary session is due to start on 23 Feb. Passage of the crucial Goods and Services Tax is likely to be back in focus, even as the implementation gets delayed beyond April 2016. Worries are that the tabling of the key bills will yet again meet strong opposition resistance, ahead of which an all-party meeting has been convened. As we await the outcome, markets keep a close eye on the progress of the re­form agenda ahead of five key state elections that are likely to be held in April-May.

On the fiscal math, as we have oft-highlighted that we see risks of a modest overshoot in the FY16/17 fiscal targets, given the need to accommodate higher spending commitments, especially a higher public sector wage/pension bill and rising banks' recapitalisation needs. The latter gained even more importance after key public-sector banks reported a sharp jump in non-performing loans and higher provisions in the Dec15 quarter, with the country's largest bank also cautioning over a challenging Mar16 quarter.

Externally, talks of an output freeze by few major oil producing nations were briefly supportive of global oil prices. While the longevity of the deal and impact is still under watch, the Indian economy benefited to a great extent from the sharp fall in crude prices from Jun14 levels until last year. Fiscal balances improved on a smaller subsidy bill, along with easing inflation and improvement in external balances. While the economy benefited signifi­cantly from the first leg of the oil price down move, the incremental boost from the next leg down towards USD 30pb/ below was limited. At this juncture, developments on the deal and its impact on oil prices will be watched keenly.

Source : Equity Bulls

Keywords