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  1. Modi’s economic review: Stock market expects more measures to check widening CAD, rupee plunge, say experts

Modi’s economic review: Stock market expects more measures to check widening CAD, rupee plunge, say experts

After the Narendra Modi-led government announced a slew of measures to control the widening current account deficit, experts noted that the markets are expecting more measures to follow soon.

By: | Published: September 17, 2018 5:03 PM
Taking stock of the measures announced by the government, BofAML said that any measure to raise FX is welcome at this point.

After the Narendra Modi-led government announced a slew of measures to control the widening current account deficit after its economic review over the weekend, stock market experts said that it was good for starters, and more measures are likely to follow. “I’m glad to see that the government and the RBI are not panicking given the rupee depreciation. My sense is what we saw over the weekend was just a start. There was a belief that government will stick to the fiscal cause. A commitment that there’s a big battery of measures that we can introduce, and let’s not get out the bazooka as it’s too premature,” Sajjid Chinoy, India economist at JP Morgan told in an interview to CNBC TV18.

Notably, the stock markets have witnessed a tumultuous trading session today, ending the day more than 500 points lower. The rupee depreciated sharply on Monday, falling 83 paise to a low of 72.6875 against the US dollar, data from Bloomberg showed.  

“The run-up in the Nifty has been led by a few stocks, and when those stocks begin to recede, you’re seeing Nifty going back lower. Valuations are pretty high, so wherever growth is visible. So right now, those stocks which are not affected by oil or the currency factor, that’s where the focus is. So, IT, pharma are the stocks of choice. Fund managers are also looking at consumer sector, where there is greater earnings visibility,” Ashish Damania, Head-Institutional Equities at IDFC Securities said.  

Taking stock of the measures announced by the government, BofAML said that any measure to raise FX is welcome at this point. “We obviously prefer a NRI bond issuance instead of a rate hike. I can’t rule out action on October 4th (by RBI) because of what’s going on. FPI investment in equities is about $500 billion, eight times of that in debt. If you hike rates and kill growth, then FPI investors will go away, leading to rupee depreciating even further. If FPI flows don’t come back, you need to do $50 billion worth of OMO (open market operations). The market is clearly looking for more from the RBI and government,” Indranil Sengupta, India economist at BofAML told CNBC TV18.

According to Ajay Bodke of Prabhudas Lilladher, the measures signal government’s intent to stem the panic that had gripped the currency market. However, impact of most of these measures would be felt not immediately but over the next few months, he said.  “What the government needs to focus on is how to address the structural deficiencies that have plagued export competitiveness of various sectors and what has hampered indigenous development of sectors such as electronics and capital goods that has led to surge in their imports adversely impacting trade & current account deficit. Lastly, rather than focusing primarily on how to fund the growing CAD policy makers need to think on how to contain it,” he said in a note.

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