2014: Temper hope with caution

ANAND KALYANARAMAN Updated - November 19, 2014 at 11:36 AM.

The recovery of sorts since August end has helped offset the continuing bad news on inflation which has only worsened. In fact, retail inflation touched a record high of 11.24 per cent in November. To the market’s surprise though, the RBI chose not to raise rates in its December monetary policy review, opting instead to wait and watch till January before making its next move.

On the political front, the BJP’s good showing in the recent state elections, seen as a precursor to next year’s general elections, has also enthused a section of the market. All these factors have helped the stock indices and the rupee to cement their gains.

The Sensex, currently at 21,194 (up 9 per cent since the beginning of the year and 18 per cent since the August low), is near its all-time high of 21,326 achieved in December. The mid-and small-cap indices too, though still 6-12 per cent below January levels, have registered an impressive 27 per cent gain since August end. The rupee has stabilised in the range of 61-62 against the dollar. The rupee and the country’s forex reserves are in better health than they were in late-August. The government is optimistic of restricting the CAD in FY14 to less than 3 per cent of GDP. So, the US Fed’s announcement in December that it will start tapering in January did not impact the market or fund flows this time around. On the contrary, the Sensex rose after the announcement, and foreign investors have been net buyers — both in equity and debt — in December. Some market mavens expect the Sensex to touch 24,000 levels in 2014. Clearly, the market has travelled quite some distance from negativity to the ‘feel good’ zone in just four months.

Caution

Despite improvement on some parameters, the economy is still not out of the woods. High inflation, in particular, remains a key concern and the RBI has made it clear that it will hike rates if the need arises. This could raise financing costs for corporate India and impact growth. Also, the government, facing a risk of exceeding its fiscal deficit target of 4.8 per cent of GDP in FY14, may rein in public expenditure in the coming months to stay within its oft-stated ‘red line’. This could also tell on GDP growth, which at below 5 per cent levels, is far from rosy. Taming inflation and kick-starting investments to take growth to a higher trajectory are key to sustaining the good run on the Sensex.

With economic growth in the developed countries picking up, there is no certainty that foreign investors will continue betting on India, especially if growth in the country does not pick up. And like cricket, elections are fraught with glorious uncertainties. An unexpected result next May could throw a wet blanket on the optimistic predictions for the Sensex.

So, even as we enter the New Year with a positive frame of mind, hoping for the best, it is important to exercise caution and not get carried away by irrational exuberance.