The month of August 2019 was not good news for Indian equity markets, says Shibani Kurian, Kotak’s head of equity research in his latest monthly update for the asset management arm of the group which was the first Indian non-banking financial company to be given a licence by the RBI.
Equity markets in India corrected during the month with the large cap Nifty Index declining 4.52% in USD terms, while the Midcap Index declined 5.32%.
“Worries over growth slowing down in the domestic front along with global uncertainties weighed on the markets. On the global front, the trade war between the US and China dominated. Domestically, we saw the Indian Government focusing on addressing the structural issues which have been an impediment to growth while staying away from knee jerk policy reactions.”
He points out that August also saw the Government deciding to withdraw the tax surcharge imposed on a certain category of Foreign Portfolio Investors in the Union Budget and RBI’s transfer of surplus to the Union Government in line with the recommendations of the Jalan Committee Report.
During the month Foreign Institutional Investors were net sellers to the tune of $2.28bn while the Domestic Institutional Investors remained net buyers to the tune of $2.73bn.
Lower than expected growth outlook
Kurian says two key factors that have contributed to the growth moderation over the last year are Shadow banking stress and weaker global demand.
“For shadow banks, access to funding has not yet fully recovered and, while funding costs have declined for most, there is still credit risk differentiation. This has hurt sectors that are dependent upon shadow banks, such as small and medium enterprises, consumer lending, and real-estate developers.”
He concludes: “With a lower than expected Q1FY20 GDP growth trajectory, we revise down our GDP growth estimate to 5.8%-6% for FY20E.
“From hereon, the key to watch out for includes: (1) favorable base effects in H2FY20 and (2) pickup in the pace of central government spending. The surplus dividend from the RBI is likely to help the Government offset the shortfall in tax collections and ensuring that there is lesser requirement to cut back on capital expenditure.”
He adds: “Our GDP growth estimate of 5.8-6% is much lower than the RBI’s estimate of 6.9% (as per the latest monetary policy report). We do expect that RBI would look at revising down their estimates post the Q1FY20 reading. With growth under pressure, it is expected that RBI has the room to cut policy rates further by 50-75bps in FY20 including a cut in the October Policy review.”
