The sharp weakness in the Indian markets on Wednesday was driven by weak growth and the prospects of higher inflation, which eventually turned out to be justified. The weak IIP numbers followed by GDP downgrade for the second quarter led to the market correcting sharply. Trump’s statement expressing unwillingness to revoke earlier tariff hikes also raised questions over the trade deal. But the big reason was the sharp fall in the Indian rupee which breached the Rs.72/$, a key psychological level in the past. That added to pressure on the markets and is likely to impact FPI flows in the near future.
There is a dire prediction by the International Energy Agency (IEA) that the Demand for crude oil could slow down post-2025. The IEA has pointed out that the global demand for oil could actually start slowing post 2025 as fuel efficiency and increased usage of electrical vehicles would lead to a compression in demand. However, despite early weakness in oil prices, Brent Crude bounced back once again above the $62/bbl mark on trade deal hopes. Aramco IPO is also keeping the oil prices relatively buoyant and Saudi Arabia, the largest exporter, would be keen to keep oil prices buoyant till the IPO is completed.
Consumer inflation has reared it is head once again as food inflation turned out to be the key trigger. Retail inflation (CPI) touched a 16-month high of 4.62% for October 2019. Retail inflation, as measured by the CPI, came in at 4.62% for October, as against the consensus estimate of 4.25%. Inflation was at 3.99% in September. The RBI has a median tolerance limit of 4% with 2% leeway either ways. However, economists and experts are of the view that the RBI may still go ahead with rate cuts. CPI was driven by a sharp spike in food inflation; getting close to 8%. Core inflation actually tapered during the month.
There is good news for the proponents of index fund and index ETF investing. Indian passive funds beat active funds for the second year in succession. Passive funds, as represented by index funds and index ETFs, outweighed the active funds on YTD basis by more than 400 basis points. Even in 2018, passive funds had earned 2.3% while active funds had negative median returns. Active funds have struggled with the SEBI’s new classification norms as well as steep volatility and concentration risk in the stock markets over the last two years. Concentration risk is evident even on the major indices.
The global economy is finally giving signs of stability. The Fed Chief, Jerome Powell, believes sustained expansion possible for US economy due to the recent flurry of interest rate cuts. Powell also pointed out that low levels of unemployment would lead to better consumer spending. In October, after the third successive rate cut, Powell indicated that the Fed may be done with rate cuts for the time being. In UK, Boris Johnson pledges to withdraw Britain from EU, if elected. As Britain braces up for another election on December 12, the current Prime Minister Boris Johnson will continue to fight elections on the BREXIT plank. Johnson is already leading pre-poll surveys with a lead over the Labour party. EU has granted an extension till January 31st, but Johnson will respect the mandate of the referendum and push BREXIT.
The troubles may be mounting at Vodafone Idea as the Vodafone CEO warns that India operations may be in dire straits. The Vodafone UK CEO has warned that the India business was adding zero value to the global telecom behemoth. Vodafone Idea has been making losses consistently for the last four quarters and is stuck with the lowest ARPUs among the three top players in the industry. In addition, the government has also rejected any review of the $13 billion AGR levy on telecom companies. The company also presents a systemic risk for banks as it has dues of Rs.100,000 crore owed to banks.
