Sensex Continues Momentum; Capital Goods & Banking Stocks Witness Buying Interest

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Indian share markets are trading on a firm note as investors cheered the ruling BJP's clean sweep in the Uttar Pradesh assembly elections, along with victories in three other states that went to polls. Sectoral indices are trading on a positive note with stocks in the capital goods sector and banking sector witnessing maximum buying interest.

The BSE Sensex is trading up 506 points (up 1.8%) and the NSE Nifty is trading up 148 points (up 1.7%). The BSE Mid Cap index is trading up by 1.4%, while the BSE Small Cap index is trading up by 1.2%. The rupee is trading at 66.20 to the US$.

In a recent development, the Reserve Bank of India (RBI) has lifted all limits on savings bank cash withdrawal post notebandi. In a two-stage process, the weekly withdrawal limit per account had been raised to Rs 50,000 from Rs 24,000, with effect from February 20. Further, all limits on ATM withdrawals were slated to cease from March 13.

While this comes as a welcome breather, the effects of notebandi are still felt on the Indian economy. And the same has also left room for doubt regarding the economic growth.

Many believe the government will support economic growth by spending more. This makes sense since growth in private investments has flagged and private consumption is dipping. So, the only way out is the government spending more for growth.

The chart below shows what portion of the increase in GDP between years comes from an increase in government expenditure.

Government Expenditure Driving GDP Growth

From forming next to nothing as a part of the increase in GDP between the years, for the period October to December 2016, an increase in government expenditure made up for 26.64% of the increase in GDP.

Hence, for every Rs 100 increase in GDP, increase in government expenditure made up for Rs 26.64 on an average.

However, this is not as straightforward as it sounds. As Vivek Kaul opines in one of his recent articles that the government can't keep driving GDP growth. As per him, increasing government spending to bail the economy out of trouble is not a sustainable solution. The government has a limited amount of money at its disposal. Sooner or later, these reserves will dwindle. And in the end, we'll need actual productivity to drive economic growth rather than government-infused funds.

To sum it up, increasing government expenditure would not be the best way to drive India's economic growth. It could very well turn into a disaster and a waste of useful resources.

For economic growth to pick up, there should be growth in private sector investments. And the government should come up with initiatives that foster such growth.

In the news from the global stock markets, all eyes are set on the FOMC meet. The US jobs data released last week has fueled optimism regarding an interest rate hike by the Fed.

US jobs data saw a strong growth in February month. Non-farm payrolls increased by 2,35,000 jobs in February. Job gains averaged 2,09,000 per month over the past three months. This was well above the 75,000 to 1,00,000 needed to keep up with growth in the working-age population.

Also, Fed Chair Janet Yellen last week signaled that the US central bank would likely raise rates at its March 14-15 policy meeting. It raised interest rates in December 2016 and has forecast three rate hikes for 2017.

The Fed's promise of more interest rate increases would lead to the end of easy money and create big trends that traders can profit from.

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