Despite dismal economic data (GDP figures for 2nd Quarter) released on the weekend, markets are in no mood to relent their run-away party that started with the installation of Modi led BJP Govt. at the centre in May 2014. The bull run has still some steam left and may continue through December series, before FII's proceed on their Christmas break. The Modi magic continues to rule the market currently, and a 25 basis point rate cut in Monetary policy to be announced on 2nd December may lend an extended lease of life to the markets.
Coming to the ground reality on economic front, there has been little respite from the stuttering economic growth. India’s economic growth slowed in the fiscal second quarter (Q2) as industrial output stagnated and investment demand remained tepid. Gross domestic product (GDP), the broadest measure of goods and services produced across the economy, grew 5.3% in the three months ended 30 September, against 5.7% in the previous three months, which was the highest in ten quarters. Manufacturing sector growth has grown by a dismal 0.1% during the quarter. At the same time the fiscal deficit for the first 7 months of the current fiscal has already reached 89.6% of the annual projection. Thus the hands of the Govt. are tied in its efforts to spur demand. Inflation as measured by CPI has grown at a lower rate of 5.5% in October 2014. Fortunately for Modi, crash in international crude-oil prices has played a major role in reduction in the rate of growth of CPI.
Modi led BJP Govt. has made the right noises so far with Modi's international diplomacy: winning votes for him in India and likes for him throughout the globe. But, with six months of honey moon period having come to an end, people are now looking forward to some big bang reform announcements by the Govt., which could revive the fortunes of manufacturing sector in India. The markets would closely watch the winter session of Parliament to seek answers to these questions. The markets would, in the short term react to the dichotomy between rhetoric and the actual figures reflected through the economic data. The liquidity driven rally may take a breather in January as the liquidity is sucked out through large divestment of PSU shares in the last quarter of this fiscal year. However, the likelihood of continuing depressed crude prices could play a major role in revival of the Indian economy. For the present, our markets seem to have extended their run ahead of fundamentals and a reasonable correction cannot be ruled out, once the FII's take a break from the markets.
