What is the issue?
- Recently, ‘Foreign portfolio investors – FPI’ have been pulling out.
- Various such factors have hurt the Indian economy badly.
How does India’s macro-economic picture look?
- India’s GDP growth is being re-rated down by many agencies.
- The fiscal deficit has hit 96% of the full fiscal target & the current account deficit is up a lot.
- As the monsoon has been average, food production may be lower than last year, thereby affecting rural consumption.
What are the external reasons?
- US Federal Reserve signalled a possible raise in policy rates soon.
- This triggered the FPI’s to rebalance to safer hard currency assets – leading to withdrawal from emerging markets like India.
- Global crude prices have climbed in the wake of the hurricanes, which knocked out US capacity.
What are the internal reasons?
- GST – Many companies are struggling to ensure GST compliance due to the laborious filings procedures.
- Working capital crunches among businesses due to the slow tax credit offsets have also become common.
- Exporters in particular, are under stress.
NPAs - The twin balance sheet problem is also a major concern as new investments are coming in.
- The new bankruptcy law may help banks in this regard.
- Monetary Policy - Inflation has shown an upward spiral.
- Also, rupee is under pressure with a 2% fall in the last fortnight.
- Hence, the Monetary Policy Committee (MPC) is unlikely to cut policy rates anytime soon – despite industry hoping for a cut.
How does the future look?
- There is no sign of revival of private investment.
- Lowering rupee could cause serious pain for entities handling external debt in the coming months.
- The market’s future direction could be defined by FPI attitude.
- If the FPI selling continues, Nifty could fall lower – thereby creating bearish trends.
- These disruptions are expected to last for a substantial period.
Source: The Hindu
