In 2019, the dominant global theme will be quantitative
tightening, with major central banks draining systemic
liquidity after a decade. This comes at a time when global
growth is sluggish and interest rates are rising.
Consequently, we expect a shift to relatively dovish stance.
Soft commodity prices on the back of sluggish growth will
also support lower inflation. Commodity-importing
emerging markets (EMs) like India can heave a sigh of relief
as macro stability has returned, and the worst is behind.
Nevertheless, we do not rule out ‘panic attacks’ in EMs,
given tightening global liquidity.
Ongoing trade will remain in limelight this year as well.
Interesting thing will be to note how it turns out after the
upcoming meeting in January.
Global growth is already facing headwinds with growth in
the European Union slowing. Chinese growth is also under
pressure, and economies from East Asia to Germany are
feeling the impact of trade wars. Quantitative tightening
and rising US interest rates imply that global growth could
come under further stress. Moreover, Countries dependent
most on exports, specially the commodities might get
suffer. Further, slowdown in developed nation might lead their domestic firms output to dump in emerging countries and will impact emerging economies as well.
General Election 2019 – The year 2019 would witness
General elections (April/May) along with a host of state
assembly elections. 4 states could have polling along with
General elections – Andhra Pradesh, Odisha, Sikkim, and
Arunachal Pradesh; followed by elections in the state of
Maharashtra, Haryana, J&K and Jharkhand later in the year.
Any change in political formations would be keenly watched
by the investors in the run up to the General elections;
however it is the fact that 5 of the 7 election years in the
past 3 decades have yielded positive returns.
GDP Growth – In 1QFY19 and 2QFY19, GDP grew by 8.2%
and 7.1%, respectively. The cyclical recovery in 1H2019 was
due to a low base of 1H2018. Despite fears of emerging
market contagion and the US-China trade war rhetoric,
India is expected to grow at 7.3% in FY2018-19. India’s
favourable demographics continue to support growth from
a long-term perspective with India remaining one of the
fastest growing economies in the world.
Indian Rupee – The INR was one of the better performing
emerging market currencies in 2017 but quantitative
tightening by the US Fed, FII outflows, emerging market
currency weakness and higher crude prices (and CAD) led to
a weak INR throughout 2018. The INR fell sharply to an alltime low of 74.39 v/s the USD but smartly recovered by
5% in the last two months, which coincided with the
sharp fall in crude oil prices. Historically, over the past 15
years the INR has witnessed long periods of overvaluation
and short periods of sharp corrections. INR levels in 2019
will primarily depend on three factors – CPI, crude prices,
global yields and it is believed that the INR will be rangebound within (+/-) 3-5% from the current level.
Crude Oil – By Oct’18, crude appreciated 36% and hit a near
4-year high of USD 86/bbl due to rising concerns regarding
sanction on Iranian oil exports by the US with many analysts
projecting a possible hit of USD 100/bbl mark. However, the
last couple of months saw a very sharp 40% correction in
crude prices due to fears of weak global demand. This fall in
price reduced pressure on CAD and provided potential for
INR appreciation. Due to increased supply and softening
demand, crude oil prices are expected to remain subdued in
CPI Inflation & RBI policy – CPI Inflation was 5.07% at the
start of 2018, while it declined sharply to 2.33% by Nov’18,
much below the medium-term target of 4% by the RBI,
mainly due to continued deflation in food prices and the
recent fall in crude oil prices. The RBI has projected inflation
at 2.7-3.2% in the 2HFY19 and 3.8-4.2% in 1HFY20. CPI
Inflation is expected to remain under control; however,
core Inflation is likely to remain elevated for the next few
months. Repo rate was at 6% in the beginning of 2018. The RBI hiked the repo rate twice by 25bps (in June and August) due to
expectations of higher inflationary pressures. The RBI changed its stance to “calibrated tightening” in its October monetary policy and has maintained the stance, keeping the repo rate unchanged.
Current Account Deficit (CAD) – In FY18, the CAD increased
to 1.9% of GDP from 0.7% in FY17. In 1HFY19, the CAD
increased to 2.7% of GDP from 1.8% in 1HFY18, on the back
of trade deficit widening. The external sector should
continue to be a headwind for the Indian economy in
CY2019. While softening crude oil prices will provide the
relief, there are some structural factors like lack of strong
export growth and uncertainty of capital flows, which will
pressurise the external sector.