The last week was quite eventful for the Indian stock markets. But, as the week comes to an end, Iran’s attack on Israel looms large.
On Tuesday, the BSE Sensex had surged past the 75,000 mark in the early hours of trade. However, markets could not hold that level, and fell thereafter. On Wednesday, the Sensex rose again, closing above the 75,000 level for the first time. On Friday, it gave up these gains, falling 1.1 per cent.
With Iran now launching an attack on Israel, this witness heightened volatility is likely to persist. There may possibly be a flight of capital towards safer assets. Geopolitical uncertainty, the possibility of the conflict escalating could also have implications for the oil market. Brent crude oil is currently hovering around $90 a barrel. For India, a major oil importer, a rise in oil prices, could have an impact on inflation, and the current account and fiscal deficits. This could have implications for policy.
That notwithstanding, the Indian stock markets have had an extraordinary run over the past year. The BSE Sensex is up almost 23 per cent. The rally among the mid and small caps has been even more spectacular — the BSE Midcap index is up 65 per cent while the Smallcap index has risen 63 per cent.
There are several factors that have pushed the markets higher. As an editorial in this paper had pointed out (‘A high point’, IE, April 10), the momentum in the economy has been stronger than many had anticipated. The Indian economy grew at 8.2 per cent in the first three quarters of the last financial year. The National Statistical Office has raised its assessment for growth for the full year to 7.6 per cent. Some believe that growth may be even higher — the NSO will release the data on May 31. Moreover, this healthy momentum is expected to continue in the ongoing year as well. The RBI has projected growth at 7 per cent in 2024-25. However, some are less optimistic. As per Moody’s Analytics, the Indian economy is likely to grow at 6.1 per cent in 2024, down from 7.7 per cent in 2023.
Markets have also been buoyed by the prospects of strong corporate earnings in the just concluded quarter (January-March 2024). TCS, which kicked off the results season on Friday, posted healthy results. At Rs 12,434 crore, its net profit was up 9.1 per cent. The management commentary accompanying the results was also upbeat. As reported in this paper, (‘TCS Q4 revenue rises 3.5 per cent’, IE, April 13), TCS CEO K Krithivasan said, “We believe that we are bottoming out. I don’t want to call it, but we should start seeing growth (in its largest market and vertical) soon with a healthy pipeline”. This is promising. Banks and automobile manufacturers are also expected to post robust results.
Until recently, markets were also anticipating that the US Federal Reserve would begin to cut interest rates in June. In fact, there were expectations of three rate cuts this year. However, recent macroeconomic data seems to have prompted a rethink.
Last Wednesday, data released by the US labour department showed that CPI inflation had edged up to 3.5 per cent in March, from 3.2 per cent in February. Core inflation remains at 3.8 per cent. Alongside, other data released pointed towards a stronger than expected US labour market. An editorial in this paper noted (‘Holding back’, IE, April 12) “a stronger-than-expected economy, and continued uncertainty over the trajectory of inflation, could possibly delay the much anticipated Fed pivot.” This uncertainty over the trajectory of interest rates in the US has unnerved investors.
Then there is the tax angle. As per a report in this paper, (‘Spooked by the Mauritius tax treaty, FPIs dump Rs 8,000 crore in equities’, IE, April 13), with the details of the India-Mauritius deal being made public, foreign investors have turned apprehensive regarding the tax implications. Mauritius is, after all, the fourth largest source of FPI investments into the country. The income tax department has, however, said that any queries will be addressed as and when the protocol comes into effect.
Also on the minds of investors are inflation in India, the policy stance of the RBI’s monetary policy committee, and the implications for growth.
On Friday, the National Statistical Office released data on inflation which showed that the consumer price index based inflation edged lower to 4.85 per cent in March. The disaggregated data shows that food inflation continues to remain elevated — the consumer food price index stood at 8.52 per cent. Core inflation, which excludes the volatile food and fuel components, remains at sub 4 per cent. Uncertainty over food prices, even as real interest rates are at levels which can be considered as “excessive”, underlines the conundrum before the monetary policy committee. As an editorial in this paper said (‘A softer landing’, IE, April 13), the MPC is likely to pivot only when “there is clarity over the monsoon, the trajectory of food inflation, and the path of crude oil prices.” The comments from the central bank will be closely tracked by investors for any signs of a policy pivot.
Over the coming week, as investors brace themselves for the fallout from the Iran-Israel conflict, voting for the national elections will also commence. The results, which will be declared on June 4, could be another trigger for the markets.
Till next week,
Ishan Bakshi
