Can Modi factor alone drive India ahead, or will the man actually deliver?
The key difference in market indices between September 2013 and November 2014 may be described in one simple phrase “Modi factor”. Sentiment in August 13, after the sharp depreciation in the value of rupee, left one and all flummoxed and business sentiment was at its lowest level. Thereafter, one saw that business climate changed, economic data — where on the one hand GDP bottomed out and on the other, inflation peaked — helped improve business confidence. The anointment of Modi as the PM candidate infused confidence in the party, but the market gave its first clear thumbs up after results to the four state elections were declared in December 2013. After the results, by and large, markets have been booming and virtually it’s been a one way street.
What’s driving the market is FII inflows, which have crossed the 27-billion mark, in the first 11 months of this calendar year, coupled with the strong belief that the man will deliver. So far no big ticket reforms have taken place but the way the government has handled the gas price hike issue and in the short time introduced draft guidelines on the e-auction of coal blocks send strong positive signals to industry at large. Secondly, the pace of decision making has been upped a few notches. Governance is at a high and the fact that bureaucrats are accountable and present to take decisions is helping matters.
The key to markets continuing to remain in positive territory depends on a couple of factors. The feel-good factor and positive sentiment is driven by hope while delivery is still a few quarters away. This is not to sound negative but people and markets seem to have swung from negative to over optimism bordering on euphoric in too short a time. Markets have run ahead of time and seem to be at levels which are expensive on all counts. The results for the quarter ended September 14 have shown that growth in sales has been poor and below expectation at about four to five per cent, while profits have grown faster. This poor growth in sales indicates that the “Modi factor” has yet to percolate to performance. The silver lining to the country’s fiscal deficit is the sharp fall in crude prices which has helped matters and also eliminated the subsidy on diesel and deregulated diesel prices.
The 40 per cent returns on the benchmark indices is impressive by all counts but this is on hope and expectation currently. The timely step taken by SEBI in explaining what categories of investors are permitted to trade through Participatory Notes is a welcome step and will help a great deal. The clarification is to ensure that unwanted speculation through undesirable people and nonregulated entities do not trade in Indian markets. Rate cut in the December review meeting is on everybody’s mind and the clamour for the same seems to be growing by the minute, even though the RBI has informally made it quite clear that the situation is not conducive to a cut currently. This could bring about a sharp short term correction in the markets and help in cooling off.