May Review : India

This was a fairly eventful month. We started the month at around 7800 and stayed within 200 points above and below this point. In the last week, we saw a huge upmove from 7740 to beyond 8100. The month also saw the state election results of several major states- Tamil Nadu, West Bengal and Assam being the most relevant. The Congress party lost vote share in all these states, and was replaced by the BJP in Assam. The Assam victory gives the BJP a new playbook for the UP elections next year, and gives them a much needed boost after the Delhi and Bihar debacles.

After the election results, the Prime Minister spoke of the importance of reforms and has stated that economic development and growth is going to be his priority for the next 3 years. During the month, private weather forecaster Skymet has a forecast of rainfall of 109% of the average this year. Coming after 2 years of drought, it is welcome news. With a large population dependent on agricultural income, this also bodes well for rural incomes.

So far this year, we have had several tailwinds-

  • The 7th pay commission is expected to add to disposable income for a lot of government employees and boost the economy.
  • A favorable monsoon is good news overall, and sectors apart from agriculture would also benefit from rural incomes rising and consumer spending increasing.
  • The central government has announced its focus on economic growth, and is likely to translate into higher emphasis on spending for generating growth.
  • Companies have reported good earnings overall. The much awaited earnings recovery since 2 years has yet to be visible with a bang, but there are green shoots.

Meanwhile, the downside risks remain-

  • Unexpectedly higher losses from PSU banks, a sign that the cleanup is not over.
  • Raghuram Rajan does not get a second term- this would be a big confidence shaker, even though the new Governor may not change course much.
  • A weaker than normal monsoon, for the third consecutive year would wreck havoc and cause severe water shortages across the country.
  • US Fed hikes rates- this would likely lead to further weakening of the Rupee, and even though it benefits exporters, it would also mean higher inflation.
  • Crude oil price recovery- due to the base effects, rising crude oil, coupled with a falling Rupee could push up inflation higher than usual.

In conclusion, a mixed bag. Keep your eyes on the monsoons, on the RBI governor's second term and the Fed. The trend is up.