Indian stock markets down 5%

Investment and production cycle are slow to turn around.

A period of correction and consolidation is underway for India, as the stock markets slide by 5% after hitting a record high in late-November.

According to a report by DBS, this weakness could merely be profit-taking or might gain momentum in the weeks to come, probably after the correction period.

DBS notes that the triggers of this downshift are largely external. Concerns over growth in the G3 economies and China, which in turn are being seen as a key reason for the over 30% fall in international crude prices (and other commodity groups) is weighing on sentiments. Jitters ahead of this week’s US FOMC meeting are also causing unease.

Here’s more from DBS:

By contrast, domestically, things are moving in the right direction, though few soft points remain. Amongst the key positives is easing inflation. Nov CPI inflation slowed to 4.4% (YoY) – a fresh low for the new inflation series (see Daily note on 15 Dec). Out yesterday, WPI inflation was flat on the year, slowest since mid-2009 and well below consensus at 1.1% and Oct’s 1.8%.

Apart from base effects, the higher proportion of tradables in the WPI basket makes the index susceptible to movements in global commodity (energy, oilseeds, minerals etc.) prices, which have eased sharply in recent months. Easing pipeline price pressures point to subdued retail prints in the coming months and will provide room for the central bank to begin cutting rates in FY16.

Progress on the twin deficits has been encouraging. The current account deficit is poised to narrow to -1.6% of GDP in FY15 down a shade from -1.7% in FY14, even as yesterday’s Nov trade data disappointed (more below). The fiscal situation was dire between Apr-Oct14, but low crude prices, diesel deregulation, divestment proceeds and spending cuts will help meet the fiscal target. Progress on labour reforms, Goods and Service Tax (GST) and relook of the Land Acquisition act, are ongoing. These will form the backbone for the government’s manufacturing-focused initiative and will attract more domestic private sector and foreign investment players.

On the other hand, the turnaround in the investment and production cycle has been slow. Projects under implementation, commercial vehicle sales and revival of stalled commitments have looked up but add-on benefit to capex interests.