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Indian Indices Trade Marginally Higher; Capital Goods Stocks Witness Buying
Fri, 8 Sep 11:30 am | Monish Vora, TM Team

Stock markets in India are presently trading near the dotted line with positive bias. Sectoral indices are trading on a mixed note with stocks in the capital goods sector and metal sector witnessing maximum buying interest. Healthcare stocks are trading in the red.

The BSE Sensex is trading up 34 points (up 0.1%) and the NSE Nifty is trading up 14 points (up 0.1%). The BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading up by 0.4%. The rupee is trading at 63.84 to the US$.

In the news from global financial markets, the European Central Bank (ECB) maintained status quo at its policy meet and left its ultra-easy monetary policy unchanged. Policy makers kept asset purchases at 60 billion euros (US$72 billion) a month until December. They also reiterated to increase the size or duration if the economy worsens.

The central bank also left interest rates unchanged and repeated that they expect borrowing costs to stay at present levels until well past the end of net asset buying.

The ECB is not in a hurry to taper stimulus as inflation is still not at the bank's target level.

After ECB chief Mario Draghi raised the prospect of policy tightening in June, he signaled that any policy tweaks would come only gradually, setting the scene for a possible discussion in September about the long-awaited tapering of its asset buys.

One shall note that the ECB has been pouring money into the eurozone to boost inflation from a near-deflationary level.

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Most of the economic problems we see today are fueled by the easy money policies that central banks have adopted around the world. However, with the changes happening at central banks of late, it seems that the end of easy money is near.

As per a leading financial daily, a report by Nomura stated that India's current account deficit (CAD) is likely to widen to 3% in the second quarter of 2017. This, as per the report, is due to a sharp deterioration in trade deficit.

Also, the Reserve Bank of India (RBI) last month stated in its annual report that fiscal consolidation may come under threat at the central and state level due to the immediate effects of Goods and Services Tax (GST), loan waivers, and pay revisions. The apex banks stated that these factors are likely to weigh on the overall growth matrix this year.

One must note that in the last one decade, Indian 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, as can be seen from the chart below:

Fiscal Deficit target of 3% of GDP

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

In other words, the government needs to fight dual challenge. First, maintaining its stance on fiscal consolidation and sticking to the fiscal deficit target of 3% of GDP for FY17-18. Second, it must relax the deficit target for reviving the economy from the shock of demonetisation.

It would be interesting to see how the government tackles these challenges ahead.

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Please Note: The stock price of Yes Bank on NSE-50 is not adjusted for face value split. Kindly refer to its BSE's quote today for the adjusted price.

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