Divergent Trend Seen In Capital Market, Economy

Mumbai, December 5: There is a strange trend being witnessed in the market where on one hand, economic growth is slowing down and on the other hand benchmark indices are hitting record highs. The recently release GDP numbers show that the Indian economy grew at 4.5 per cent for the September quarter (Q2), the benchmark Nifty has gained consistently for third month at the end of November. The Nifty has yielded 13 per cent in the current calendar year till date, while Q2 GDP numbers are at 24 quarters low. 

It was up 2.3 per cent in November, after making stellar gains of 3.5 per cent in October and 4.1 per cent in September. Nifty also managed to touch a new life high during November touching 12,158 points. Nifty Bank was up almost 7 per cent largely driven by PSU banking index which rose more than 14 per cent in November. On the other hand, from 5 per cent growth rate achieved in Q1 (April-June), the GDP number came down to 4.5 per cent. 

Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities said, “The stock market has been trending lower in the last couple of trading sessions for various reasons including slippage in Q2 GDP numbers, it will not change the medium term trajectory for equities.”

Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services said, “While overall Market Sentiments continue to remain positive, there is some cautiousness as well as profit booking seen at higher levels. Further, weakness in underlying economy (Q2GDP at 4.5 per cent) as well slower earnings growth leave limited room for upside. However the current momentum can sustain in the near term on the back of strong liquidity flows and positive sentiments.”

 “Going forward, we believe fiscal policy will need to play a dominant role in supporting overall growth. The government may choose to mildly deviate from its fiscal deficit target for this year as well as next fiscal,” Ambani said

With the growth rate slipping below 5 per cent and slow down gathering momentum, Economy observers are expecting the Reserve Bank of India (RBI) opting for further 25 basis points (BPs) rate cut during its December monetary policy committee (MPC) meet.  

Deepthi Mary Mathew, Economist at Geojit Financial Services said, “All the indicators ranging from IIP, electricity consumption to core inflation rate were pointing towards the fact that the economy has not entered the revival path. The slowdown in consumption is indeed worrying, as its revival is important for investment to pick up. The Private Final Consumption Expenditure (PFCE) declined to 5 per cent Year-on-Year (YoY) compared to 9.7 per cent.  With the growth slipping to 4.5 percent, it is expected that RBI will go for the next round of rate cut in December MPC."

Ambani said, for the fiscal year FY20, our real GDP forecast stands at 5.2 per cent, with risks to further downside. After 135 basis rate cut delivered by the RBI since February 2019, we expect the RBI to cut rates by an additional 25 bps in December MPC meeting, taking the repo rate to 4.90 per cent. 

Commenting on GDP slowing down further, Dr. Joseph Thomas, Head of Research, Emkay Wealth Management said, “Stronger fiscal stimulus is required to stem further fall in GDP, without which it could be still lower as we move into the next financial year. Measures to stimulate demand needs to be taken immediately, in the absence of which counter cyclical actions may not bear fruit.”