FE Editorial : But markets unmoved

Written by The Financial Express | Updated: Jan 2 2013, 04:36am hrs
Global liquidity is driving markets, thats not drying up

Despite the economy having slowed further, the rupee weakening and earnings below expectations, India was among the top performing markets of 2012. Much of it, of course, had to do with the easy money policies of central bankers across the globe, a stance that left markets with abundant liquidity and fund managers in a risk on mode for most of the year. Nonetheless, India seems to have attracted more than its fair share of flowsforeign investors lapped up stocks worth $24.5 billion, the second-highest ever in a year. While the proposed introduction of GAAR caused some concern in March and April, subsequent eventsa new finance minister in P Chidambaramand the promise of reform and rate cuts prompted fund managers to up their weightages. As did the fact that the market was slightly under-valued compared to the historical average.

With the winter session of Parliament having been fairly fruitful, theres greater conviction now that economy and earnings are troughing outa hike in agriculture growth in FY14 will alone add around 0.5 percentage points to GDP. Much, however, depends on how well the US resolves the fiscal cliff issue and what repercussions this has on a debilitated global economy. Sluggish exports are already hurting the economythe latest CAD, at 5.4% of GDP, is ample evidence of thiseven as crude oil prices remain close to the $100 mark, keeping the import bill high. So, macroeconomic headwinds havent quite receded and will not until theres meaningful reformsharp reduction in subsidies for fuel and fertiliser. Moreover, with companies still unable to access key resources and no law in place for land acquisition, its hard to see how new projects are going to take off. The more immediate worry for foreign investors would be GAAR; if the government does as the Shome Committee wants and delays the legislation by three years, dilutes the norms and abolishes the capital gains tax on listed securities, investors will be mollified. A stringent view on investments via the Mauritius route, however, could hurt the sentiment.