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Indian Indices Continue Momentum; Banking Sector Up 1.5%
Thu, 18 Jan 11:30 am

Stock markets in India have continued their momentum and are presently trading on a positive note. All sectoral indices are trading on a positive note with stocks in the banking sector and FMCG sector witnessing maximum buying interest. Metal stocks are trading in the red.

The BSE Sensex is trading up 362 points (up 1%) and the NSE Nifty is trading up 74 points (up 0.7%). The BSE Mid Cap index is trading down by 0.4%, while the BSE Small Cap index is trading flat. The rupee is trading at 63.83 to the US dollar.

In the news from the global financial markets, US industrial production increased more than expected in December. This was seen as unseasonably cold weather at the end of the year boosted demand for heating.

Industrial output surged 0.9% in December after slipping 0.1% in November. This was seen on the back of robust gains in mining production.

For all of 2017, industrial output rose 1.8% - the first and largest increase since 2014.

In another report, the Federal Reserve also stated that the US economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher.

As per the report, several regional Fed districts observed increases in manufacturing, construction, and transportation input costs. Others reported expectations of further wage increases in the coming months, though prices pressures were still mixed.

Whether the report will alleviate the Fed's concerns about tepid inflation is still unclear. Note that the inflation in US has remained below the central bank's 2% target for more than five years now.

Despite the weak inflation overall, Fed policymakers currently expect to raise interest rates three times this year. The central bank raised rates three times in 2017 against a backdrop of steady growth and low unemployment.

Note that with the US economy chugging along for many months, the Fed is now gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

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Yet, so far, the cost of lending has been slow to respond to the interest rate increases. But as the Fed continues with this policy, consumers who borrow to buy houses, cars, refrigerators, and other items will have to pay more for those goods.

US Federal Reserve rate hikes generally have a negative impact on emerging economies. But currently, India is seen as better equipped than other emerging markets to ride the impact of higher US interest rates on the back of stronger economic growth.

How this pans out and what impact it would have on the global financial markets remains to be seen. We'll keep you updated on the developments in this space.

In the news from macroeconomic front, India's December trade deficit widened to its highest in more than three years. This was seen as higher import bills for gold and crude oil weighed on rising exports.

Trade Deficit Widens

In December, exports increased by 12.3% to US$27 billion, while imports increased by 21.1% to US$41.9 billion, while imports of gold, precious stones and crude oil surged during the last month.

As per the data released by the commerce ministry, the trade deficit or the difference between imports and exports was US$14.88 billion, up about 41% YoY. The gap had touched US$16.2 billion in November 2014.

A wider current account deficit in the midst of a sharp rise in oil prices, fiscal slippage risks, and above-target inflation point to a weaker macro backdrop for the economy.

One must also note that in the last one decade, India is making serious efforts to reduce the fiscal deficit level. Ever since, the new government came in it has been in favor of fiscal consolidation and meet the long term fiscal deficit target of 3% by FY17-18. This will be the lowest target compared to the last couple of years.

That said, challenges remain in achieving the above stated target. The notebandi exercise resulted in a slowdown. Further, government announced flurry of projects but execution is still pending. This means the government needs to relax its spending to spurt the growth again.

This means, once again, the government needs to fight dual challenge. First, maintaining its stance on fiscal consolidation and sticking it fiscal deficit target of 3% of GDP for FY17-18. Second, it must relax the deficit target for reviving the economic growth from the shock of demonetisation.

It is also worthwhile to note that creating economic growth by the government spending its way out of trouble, cannot continue indefinitely.

As Vivek Kaul writes in one of his recent editions of the Vivek Kaul's Diary... 'At the end of the day the government has a limited amount of money at its disposal. Further, its expenditure tends to be terribly leaky and does not reach a major portion of those it is intended for.'

It would be interesting to see how the government tackles the above challenges. We'll keep you updated on the developments from this space.

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