Indian Stocks: Will the Bear Hug Tighten?

Fri, 29 Jan Pre-Open

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Few days back, a report suggested that India's GDP growth rate is likely to accelerate gradually. It also pointed out that inflation is expected to remain below 5% over the next two years. On a conclusive note, it stated that there are many domestic factors which are supporting the Indian growth story. Statements such as above are doing the rounds for quite a while. And they have been pushed enough to spark optimism for an all good and promising 2016.

However, as always, things are not as they seem to be. While there are factors fueling the Indian growth story, many conditions are holding back the pace of growth. Let's note down some of them...

The Effect of Slowing Global Economy

An article in Economic Times opines that with serious troubles circling the global economy, it is foolhardy to expect India to enjoy immunity. And this is true. If one has to go by history, global economic worries have caused jitters and volatilities in India. As one of the recent articles from the Vivek Kaul's Diary states that India can't be totally disconnected from a slowing global economy. You can read the entire article here. From what is being seen, there can be sensed some further troubles in the global economy. And they will have a ripple effect on Indian markets.

The Rupee Depreciation

The last few days have seen the rupee sliding considerably against the dollar. And the way it is heading down, it can perhaps be the talking point in the coming days. It now takes more than 68 rupees to buy one dollar. At the time of writing, the rupee stood at 68.22 to the US dollar. This level isn't that far from the all-time lows witnessed in August 2013, when it stood at 68.80. And it may very well touch those levels. This can be said as many factors such as a fall in exports, low levels of foreign investments, the US rate hike, etc. have raised concerns and weighed on the rupee.

Fall in Exports

Indian exports have fallen dramatically. One can note that the performance on the export front has been poor during the second half of 2015. While this fall might find some safe haven from a depreciating rupee, weaker manufacturing activity coupled with poor logistics can limit the benefit.

The Banking Story: More Defaulters to Feed the NPA Crisis

NPAs are said to rise further in the initial months of 2016. This is as the RBI has reportedly identified top 150 defaulters and has asked banks to make additional provisions for these loans. To note, the primary reason for an alarming rise in NPAs was excessive lending by banks to these companies. And these companies were further proved out as not being in a position to repay those loans. With the facts at hand, they still aren't. With the above dilemma, banks had entered 2016 with US$ 60 billion red ink on their books. With rising NPAs, profitability of banks is said to take a further hit.

Will 2016 be a Dull Year for India?

If one has to tell, bets can be placed on both the sides. There are factors that may propel growth in India. On the other hand, there are factors that might act as hurdle for the Indian growth story. Only time will tell how things will pan out.

Till then, one needs to be hopeful. The government shall also initiate some reforms to take the economy to a higher growth trajectory. It needs to work on improving the country's exports growth. Also, the government should try to control the deficit problems and revive the investment scenario in the country. For the banking sector, a serious clean-up job is a must. For that to happen, banks need to strengthen their internal control system and risk management system.

As for investors, one has to make sure that our expectations are in line with reality. For that, one should stay focused on the facts and not fall for the media propaganda.

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