Indian markets to focus on domestic and external cues

Indian markets regained balance yesterday after the weekend's terror attacks in Paris, with focus next on domestic and external cues. Into Nov, foreign portfolio investors have maintained a cautious stance. After a brief relief in Oct, foreign equity holdings were trimmed by about USD 500mn yet far in Nov, with a smaller USD 25mn out of debt. Benchmark equity index SENSEX is down 3% since end-Oct. Limited room for further rate cuts, inflation uptick and strong issuance pipeline meanwhile put a floor on 10y bond yields. 

External headwinds have primarily been from a re-pricing of US rate hike risks, first of which is expected in Dec. Back home, setback at a key state election triggered a temporary correction, but recovered on signs that the reform agenda remained on course. Further out, still-subdued corporate earnings and the likelihood of an unproductive winter parliamentary session will keep optimism in check. An anticipated 15% hike in the government emplyees salaries under the seventh pay commission recommendations is meanwhile seen as positive for growth. The panel is due to table its report later this week. 

In the past week, the government signaled its intent to keep the reform process ongoing ahead of the parliamentary session. Easing of FDI regulations was preceded by a revival package for heavily indebted state power distribution companies (discoms). The proposed measures are aimed at a) easing the financial burden over these companies by clearing up past debt and losses; b) make state governments more accountable by putting in place deterrents to lift these discoms out of debt by FY18; c) plans to gradually raise tariffs to bring it line with costs. Its return to health will lift some of the pressure off the banks' balance sheets. At the same time, minimum support prices for pulses and selected winter crops were raised by 5-10%, with the intention to influence sowing patterns and ensuring ample supply. 

More such affirmative action is in the pipeline, according to press reports citing government officials. Groundwork on several other initiatives like the monetary policy framework, bankruptcy law and subsidy reforms, amongst others are expected to be rolled out before the parliamentary session starts on 26 November. On the subsidy front, plans are afoot to run pilot schemes to kick start direct benefit transfers for LPG subsidies. 

However tough decisions are still-pending. Passage of the Goods and Services tax, bankruptcy law and land acquisition (if re-visited) has become key barometers of the government's ability to push through legislative changes. Amongst these much attention is on the GST constitutional amendments, where some softening of stance is expected. Recent developments heighten the risk of stiff resistance, which will require the government to reach out to the opposition to build consensus, especially as gaining a majority in the Upper house is not on the anvil.