The recent upsurge in stock markets are reflective of the changes in macroeconomic fortunes in the country. Fiscal consolidation, inflation management, Current account deficit control have been occupying governments attention for long. The efforts of the government seems to have paid off.
Fiscal deficit, though sort of target set under FRBMA of 3 %, is still at comfortable levels of 4.6 %. Slowing down of Fiscal deficit has been due to expenditure compression by government. Subsidies in petrol and diesel have been reduced by small regular increases. LPG cylinders have been limited to 12 cylinders.
Current account deficit has been curtailed at a manageable level of 50 Billion dollars in year 2013-14. At such as level, financial inflows in the capital account can easily cover the CAD, without drawing on Foreign exchange reserves. Import duties on Gold, promotion of inflation indexed bonds, resurgence in export growth – all have contributed in bringing CAD to a manageable level.
Inflation, an adjunct of growth, has a debilitating impact on disposable income of people, export competitiveness and exchange rates. High inflation had forced the RBI to come with a tight monetary policy aimed at inflation reduction. Thankfully, the efforts of RBI seems to have paid and Inflation both WPI and CPI is on decline. In coming days, RBI would have the headroom to lower policy rates which would give fillip to growth.
Finally, Stock market upsurges in recent past in not only on account of improving macroeconomic fundamentals but is also seen as some merely a pre-election rally. It’s impossible to pin down the precise reasons of exuberance in market but investors are definitely not complaining. We are certainly headed for better times.
Scribbles of a Chaotic Mind 