Just a few weeks ago Indian economy was staring at disaster. With GDP growth down to 4.4% in the first quarter, the slowest in four years, Rupee depreciating to record low of around Rs 69 to a US Dollar and a record Current Account Deficit, Foreign Institutional Investors were pulling out their money and suddenly everyone was writing off India, some even going to the extent of flagging off an doomsday scenario.
Nothing of that sort was in sight on Thursday, though. The US Federal Reserve surprised markets around the world by postponing its process of winding down its huge monetary stimulus and instead Fed Chairman Ben Bernanke said that it would wait for more evidence of solid economic growth before starting to withdraw its stimulus.
This brought cheer to markets globally including India. At one point of time in the afternoon trade, the Bombay Stock Exchange’s Sensex had climbed 3 percent to its highest intra-day level in more than 2 years. The National Stock Exchange Nifty too was up over 3 percent, the rally led by banking stocks, in particular, in hope that Reserve Bank of India Governor Raghuram Rajan would relax some of the recent monetary tightening measures in the policy announcement on Friday.
The Rupee too had recovered to under Rs 61, jumping more than 2.5 percent to a month high.
Hey, but don’t just start celebrating yet. The Fed postponing the stimulus withdrawal has put some wind back into the sail. It has given some respite for emerging markets like India. But don’t think the good times are back.
Of course there have been some signs in recent weeks that things are likely on the mend. India’s exports in August rose at its fastest pace in the past two years, which helped the trade deficit hit a four-month low.
Domestic automobile sales also increased in August, ending a nine-month stretch of declines. But lets not forget, the sales growth was only due to a jump in dispatches at Maruti Suzuki, which had been hit by a labour unrest at its Manesar plant, in the year ago period.
Except for some of the new launches like Ford Ecosport and Honda Amaze, sales across companies remain sluggish and huge discounts/benefits are still being offered.
The deceleration in commercial vehicle sales also shows no signs of a turnaround any time soon.
The Current Account Deficit still remains very high, although some of the recent measures announced by the Finance Ministry and the pickup in exports will help.
Inflation surged to a six-month high in August on the back of higher import costs and a sharp rise in price of onion and other vegetables. The wholesale price index rose to 6.1 percent last month.
This high inflation will surely weigh on Rajan’s monetary policy review on Friday.
If the US economy continues to show strong signs of recovery, the Fed will begin winding down its stimulus a few months down the line.
With the Fed at least postponing that right now, India and other emerging markets, which have taken a battering, can breathe easy. A good monsoon and the festive season will also boost domestic consumption at least for the next few months.
But the future is still hazy. For the Indian economy to get back its mojo, more reforms measures must come.