Caution is the watchword for now as growth momentum may slow down

Last Updated: Tue, Nov 29, 2016 15:33 hrs
A man looks at a screen across a road displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building in Mumbai

Fitch Ratings has lowere India's GDP growth forecast to 6.9% in the current financial year, down from an earlier forecast for a 7.4% growth, citing the likely impact of demonetisation on the economy.

On Monday, Morgan Stanley lowered its growth forecast for India in financial year 2017 to 7.3% from its earlier projection of 7.7%, on account of currency replacement programme. But then, it expects investments and capacity expansion in 2018 after a gap of six years of weak trend.

A couple of months ago, the International Monetary Fund had raised India's growth forecast for 2016-17 to 7.6%, citing resilience of its economy and robust growth momentum. Around three months prior to that, the IMF had projected a 7.4% growth for the Indian economy.

Now, with demonetisation of heavy currencies set to make a negative impact on the economy, at least in the short run, a drop in momentum is almost certain.

The current quarter, as well the one ending March 2017, if not beyond that, are going to be quite tough for economy.

The stock market is likely to see some volatile spells during this phase, and at times, movements are likely to be rangebound. Third quarter results may turn out to be disappointing, but the slide, if any, unlikely to continue for long.

A rate hike in the U.S. might trigger a sell-off in emerging markets and the Indian market is likely to feel the heat as well. The rupee is currently trading near record lows against the U.S. dollar and further weakness is not ruled out. It is widely tipped to breach the 70 a dollar mark.

For now, a rate cut from the Reserve Bank of India looks a bit unlikely, given the central bank's directive to banks to maintain a cash reserve ratio of 100%. So, instead of a tax cut, it won't be surprising if banks decide to hike lending rates and cut down rates on deposits.

Take stock specific calls and it would be better to refrain from indulging in any big buying even at sharply lower levels as a knee jerk reaction could spell some trouble for stocks of companies that have pretty strong fundamentals.

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