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Illustration: Jayachandran/Mint<br />
With a big disinvestment programme on the anvil, keeping the markets happy will will be quite important.
A new Samvat year begins this week and it’s time to take stock of the past year and wonder what’s in store for the stock markets for the year ahead. Looking back, the most important factor has been the growth cliff down which the Indian economy plunged. Yet the Sensex has shrugged off the fall and is up modestly since last Diwali, due to portfolio inflows. Foreign investors have kept the faith, in spite of our myriad problems. Yet optimism has been markedly absent among local investors. Market indices would have been far higher had local institutions and retail investors not been net sellers.
But then, the considerations that affect foreign investors are different from local concerns. A policy of extended monetary easing by central banks in developed countries combined with very low growth there has led to global investors searching for higher returns. That has led to money flowing into equities across the world. The Dow Jones Industrial Average, even after the recent fall, is up almost as much as the Sensex in the past one year. So, rather surprisingly, is MSCI Europe. On the other hand, Indian investors, rattled by low growth and policy paralysis for much of the year, preferred to keep their money in fixed deposits, particularly as interest rates have remained high.
Will we see a change in Samvat 2069? The markets are worried that a fiscal contraction in the US could slow growth there, while the Purchasing Managers’ indices show that growth in core Europe has now been affected by contagion from the periphery. The outlook on China remains clouded. In other words, uncertainty continues to plague the global economy. The silver, or should one say the gold, lining is that monetary policy is likely to continue to be very loose in the developed world. By lowering the risk-free rate, these policies lead to portfolio rebalancing and a reallocation towards risky assets.
Back home, recent government initiatives are yet to translate into increased confidence among domestic investors. Outflows from equity mutual funds continued for the fifth month in October, as investors took advantage of higher prices to book profits. There’s a lot of scepticism about the government’s ability to rein in the fiscal deficit, especially without harming capital expenditure in the process. Inflation remains high and corporate earnings leave little room for optimism. The current account continues to be a concern.
Everything depends, therefore, on the ability of the government to curb the deficit and at the same time revive investment demand. With a big disinvestment programme on the anvil, keeping the markets happy will have to be an essential part of government strategy.