Stock markets cautious about rising fiscal slippages, says UBS

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Published: July 4, 2018 10:16:39 AM

Even as the macro factors weigh on Sensex and Nifty back home, UBS says that  rising states’ fiscal deficit have kept the stock markets on a cautious mode.

The current account deficit (CAD) widened to 1.9% of GDP in FY18 from 0.7% of GDP in FY17, UBS noted.

Even as the macro factors weigh on Sensex and Nifty back home, UBS says that  rising states’ fiscal deficit have kept the stock markets on a cautious mode. “The concerns on GST collections, rising states’ fiscal deficit and the risk of populist spending ahead of 2019 elections is keeping markets on tenterhooks regarding possible fiscal slippages,” UBS said in a note.  

Notably, experts point out that there may be populist spending ahead of the all-important general elections in 2019. “Next 12 months are mostly going to be about the 2019 elections with government’s focus shifting to populist measures from infrastructure development & policy reforms, while investors might stay concerned about the outcome,” Jatin Khemani of Stalwart Advisors told FE Online.

However, he added that over longer time frames, there hasn’t been a strong correlation between market returns and any specific government. “Over last 30 years, average equity returns have been healthy irrespective of whether we had a clear winner or a coalition, an NDA or a UPA,” he observed.

UBS noted that on the inflation front too, there is concern. “Headline CPI inflation at 4.9% YoY as of May 2018 has moved above the RBI’s inflation target band of 4%. The current account deficit (CAD) widened to 1.9% of GDP in FY18 from 0.7% of GDP in FY17. Building in higher global crude oil prices and an ongoing modest investment demand recovery, we estimate this deficit will widen further to 2.5% of GDP in FY19,” Tanvee Gupta Jain & Mr. Rohit Arora of UBS said in a note.

On the macro front the tightening in global financial conditions and USD strength has resulted in (a) the Indian rupee (INR) being one of the worst-performing currencies against the USD compared with peers and hit an all-time low recently, notes the firm.  

“A slowdown in capital flows with FII (equity & debt) registering an outflow of $9 billion in the June 2018 quarter (-1.4% of GDP, annualised) and tightening in domestic financial conditions with the spread between short-term rates and the repo rate the highest since the 2013 taper tantrum episode, thus having adverse implications on investment cycle recovery and hence the growth outlook,” said the report adding that India is not immune, and if global financial conditions remain tight and/or global risk aversion rises from here, it will bear the brunt in the form of an adverse impact on growth and financial stability.

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