Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now

You can switch off notifications anytime using browser settings.
Stock Analysis, IPO, Mutual Funds, Bonds & More
  • Sudhakar Shanbhag

    Chief Investment Officer, Kotak Mahindra Life Insurance Company Limited
    He plays an important role in developing and managing investment structures, processes and practices to enable customers reap benefits. He has been part of Kotak Mahindra Group in varying capacities for over two decades. A chartered accountant and a widely quoted knowledge leader in the investment domain, he comes with over 2 decades of work experience.

Deep structural reforms only way to reverse economic slowdown

The government has limited scope to do stimulus given the fiscal constraints.

Aug 22, 2019, 09.27 PM IST
Getty Images
Net profit of Nifty for the June quarter increased by 1.8 per cent on a yearly basis, which was marginally above expectations. The earnings were supported by low base of banks, which were offset by marked decline in profits in automobiles and components as well as oil & gas and consumable fuels sectors.

The net profit growth for FY20, which started with high teens and above is now been downgraded to low teens or lower. Further downgrades to earnings seem to be a possibility due to domestic consumption and investment sectors, including autos, capital goods, construction material and consumer durables, which depict continued subdued demand conditions as well as global economic slowdown putting pressure on global commodity and IT sectors.

It is evident that deep structural reforms may be the only option to reverse the current economic slowdown and increase India’s investment and GDP growth rates. The government has limited scope to do stimulus given the fiscal constraints. The Budget has also raised taxes across the board, which will curtail consumption. The RBI may cut policy rates by another 15 to 40 bps, but may not be sufficient to revive economic growth, since bank lending and borrowing rates have not fallen much due to various reasons. Households too have slowed down on their consumption due to their discomfort with regards to general economic conditions whereas a dip in household savings rate has also been observed.

India’s broad market valuations may look reasonable compared with historical average with the recent correction in the market. However, overall valuations offer little in terms of investment inputs currently, even less than usual given large price value distortions across the market.

The current market makes investing more difficult due to the large variations where we find a section of the market super expensive and the other section super cheap, the continuation of price value distortions across entire market valuation spectrum for long periods of time thanks to central banks pumping money thus diluting the concept of risk as also uncertain global and domestic macroeconomic conditions.

Bond yields no longer represent correct level of risks to companies cash flows since loose monetary policies of global central banks have suppressed the yields, where low risk free rates may not necessarily mean low cost of equity. The only hope seems to be that global liquidity (with quite a lot of government debt yielding negative returns) chases markets such as India where there is still growth available relative to the world.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service