In the third quarter of 2016-17, gross domestic product (GDP) grew at a robust 7 per cent. But there is little evidence of a broad-based revival in economic activity.
In the light of the recent economic data, HSBC
Global Research expects FY18 gross domestic product (GDP) growth to be lower than what the Reserve Bank of India (RBI) is currently projecting. Despite this uncertain outlook, the stock markets in India have soared. As Chart 1 shows, the Sensex is hovering around its all-time high.
But India isn’t really an outlier. As Chart 2 shows, major emerging market stock indices have also rallied of late. On a price to earnings ratio comparison, the Sensex is the most expensive emerging market after the Jakarta composite index and the Mexico IPC, as seen in Chart 3. Much of this surge is a consequence of global liquidity. As Chart 4 shows, FII flows into India since January totalled Rs 43,728 crore.
A similar surge in capital flows is also observed across other emerging markets as well, suggesting that global liquidity is at play. As shown in Chart 5, since January Mexico has received $9.5 billion while Taiwan has received $5.9 billion. Stock market volatility has also declined. As seen in Chart 6, the NSE volatility index has fallen in the last few months, in line with the decline seen in the US. One could argue that stock markets are forward looking and as such have priced in an earnings growth rate of 27 per cent in FY18 (Chart 7). But there is reason to be cautious.
There is still no sign of a resolution of the twin balance sheet problem. Sentiment remains weak. And with the RBI
expecting the inflation rate to firm up in the coming months, the scope for easing monetary policy remains limited.
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