Local spoilsport

It is domestic factors that could dampen investor sentiment

While stock market investors are pre-occupied with developments in Greece and China, it is domestic factors that may end up spoiling the party for India. The macro numbers reported recently do not paint a pretty picture. Retail inflation at 5.4% for June is the highest in eight months and industrial activity is not picking up at the desired pace although it is better than the past year. For the first five months of 2015, industrial growth has been 3.5% compared to 1.4% for the same period last year, but in May, growth slowed to 2.7% compared to 3.4% in April. While inflation has inched up in anticipation of a weak monsoon, the lower industrial growth is a result of consumer oriented sectors recording weak performance due to less than expected rural demand.

Although the monsoon so far is not as bad as feared, it might still act as a constraint on further rate cuts required to foster a capex revival. While there is no clarity on whether the Fed will raise rates in the coming months, the risk of a rise is not something the RBI can ignore and that will be one more argument against a rate cut. The other bad news is the 20.2% decline in May in merchandise exports, making it the sixth month of falling exports. That scenario, too, is unlikely to change as it is led by weaker demand in Europe. Amid all this weak data, foreign institutional investors continue to keep the faith and net inflows in 2015 has been $2.75 billion so far. The worry led by global factors might have subsided a bit but domestic factors offer little comfort.