Markets will now look for concrete action from the Modi government to decide future trend
With the Bharatiya Janata Party-led National Democratic Alliance surging into an early lead as counting started for the Lok Sabha elections, the Sensex crossed the 40,000 mark and the Nifty topped 12,000. The crossover was momentary, but the question to be asked now is whether these are the new barriers for the markets or will they be breached over the next few days?
The markets were hoping for a stable government. They have got one, now. A stable government is expected to ensure continuity in the reforms process. That’s where the good news ends.
Continuity in the reforms process is one thing, but the scope of the problems that need to be tackled on a war footing is something else altogether. That investors are cognisant of these problems is evident from these statistics: The biggest change in open interest is on options with strike prices higher than 12,000. Profit booking has taken place in calls, while those in put option continue to be open indicating downside risk.
The data clearly suggests that most of the rally is over. The elections are behind us and the economy takes centre stage now. Sooner rather than later, the markets will start discounting macroeconomic issues. Indeed, by the end of the day, the Sensex had fallen 0.76% to 38,811 and the Nifty 0.69% to 11,657 indicating that the initial euphoria is over.
The government’s economic managers face a veritable laundry list of concerns facing. The markets will be looking for solutions for the NBFC crisis, the continuing clean-up of the banking system, employment, and stress in the rural economy among others. True, these issues have been around for some time but the markets have been focussed on the outcome of elections. What matters now is the government looking at new approaches and new solutions to these old problems, including some that have been around for decades like power sector balance sheets. The good thing is that the government has been blessed with a historic mandate.
Of course, the overarching and immediate problem is the growth slowdown. Here, the government has limited fiscal space to push growth. Remember, that in the previous term of the NDA, the GDP growth rate was near the 7 percent mark on account of increased government spending. Such a spending programme looks difficult now. There is some pick-up in GST collection of late, but it is still early days.
That’s not all.
The economic growth problem is linked to corporate earnings as well. The recent March 2019 quarter numbers were not too encouraging, the same is expected in the June quarter as well. Progress of the monsoon and a pick-up in on-the-ground activity which will reflect in corporate numbers will key variables for domestic and foreign investors.
In this context, it is important that the government sends the right signals. The budget, of course, will outline the reforms path for the next five years and also the immediate steps the government will take to boost growth.
The selection of the finance minister will be the first signal. There have been questions raised over the finance minister Arun Jaitley’s policies. A new and friendly face in the finance ministry will be welcome. Similarly, the selection of key ministries, especially for sectors which are facing stress will be key. Decisive action from the government will now decide the market direction.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.