how 2013 influences 2014
TRANSCRIPT
How 2013 influences 2014
Year Gone By & Way Ahead…
• When 2013 started, everyone was full of hope that it could be the
turnaround year for the Indian economy, when things will slowly pick up. It
was not to be, especially with the few global factors that hit us out of
nowhere.
• Despite that and the subsequent high volatility throughout the year, the
stock markets ended the year with gains. The BSE Sensex rose 8% in 2013
from the previous year.
• Here are a few themes that dominated the markets in the year gone by
and would continue to influence in 2014:
Quantitative Easing
• The Federal Reserve is the US central
bank.
• It decides the monetary policy and
when required, buys bonds from the
market to inject liquidity into the
system.
• Ever since the 2008 financial crisis, it
has been doing so. This is called
Quantitative Easing.
US Central Bank Action
• In May 2013, Ben Bernanke, the then Fed chief, announced that the central
bank may look at cutting down bond purchases if the US economy continues
to improve.
• Markets fell world over, while the US dollar gained value against a basket of
currencies. Emerging markets like India were hit badly.
• Later, it was expected that the taper would begin only in 2014. This helped
soothe market worries.
• As the US central bank continues with the tapering, share prices across
emerging markets are expected to be on the edge.
India’s Twin Deficits
• India’s high fiscal deficit (which equals the borrowing done by the
government to meet expenditure) keeps interest rates high.
• The current account deficit (the money India owes to the world in foreign
currency) or CAD puts pressure on the rupee.
RBI & the Rupee
• With such fundamentals, India was considered a far riskier bet among
emerging economies.
• As a result, foreign institutional investors (FIIs) turned net sellers in both
equity and debt markets.
• This caused the rupee to plunge to Rs 69-to-a-dollar level.
• It was the worst performing currency among all emerging market
currencies.
• RBI too steps to stem the fall. The measures helped rupee moderate to
trade in the range of 60 and 62 after August 2013.
Growth Estimates Cut
• Analysts across the board cut estimates in May 2013 of India’s GDP
growth in FY14 to around 5% from 6-6.5% earlier.
• Low productivity, lack of investments, high inflation and fall in demand
continues to hurt India’s economy.
• In the latest macro-economic development report, RBI expects growth to
fall short of the 5% estimate.
Gold Imports
• India’s current account deficit rose nearly ten-fold in the five years
between 2007 and 2012.
• Oil and gold imports contributed largely to this.
• To bring down CAD, the government discouraged the import of gold by
increasing duties. It also imposed restrictions on gold loans to lower the
demand for the yellow metal.
• Towards the end of 2013, the trade deficit (the difference between imports
and exports) fell to $110 billion between April and September as against
$146.8 billion in the previous year.
• Import of gold and silver dropped 30% during the period. As a result, CAD
dropped to 1.2% of the GDP in the July-September quarter from a high of
4.8% in 2012-13.
CAD & Rupee
• For the entire fiscal year ending March 2014, it is expected to be 2.5% of
the GDP, according to RBI data.
• The trend in the current account deficit would be watched closely as it would
influence the direction of the Indian rupee.
Estimating CAD & Rupee
Election & Market Expectations
• Politics too was a big factor. India is heading for elections in 2014.
• Ahead of that, the assembly elections in Madhya Pradesh, Rajasthan,
Chattisgarh and Delhi in November were eyed as a harbinger of what is to
be expected in the general elections.
• The markets rallied after the state election results, which showed that BJP
was in a position of strength.
• The stock market expects BJP to be investment friendly.
This theme is likely to dominate in 2014 as well.
Election & Current Government
• An election year means the current government could announce measures
to appeal to voters. These will be also watched for any adverse effects on
the government’s finances.
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