FxWirePro: Further Selloffs likely in India’s Nifty50

Things are not looking too bright for the Indian economy, which was growing at the fastest pace in the entire world just a few years back. In the second quarter of 2016, the annualized pace of growth reached 9.2 percent but waned since and reached as low as 5.7 percent in the second quarter of 2017. It has somewhat bounced back to reach 6.3 percent in the third quarter but that pace is far slower than the peak.

In addition to that, several drastic measures taken up by the Narendra Modi government since 2015 such as demonetization of the economy which relied on cash for 86 percent of the transactions have cost the middle class and small businesses dearly. Moreover, rapid implementation without sufficient planning of tax reforms known as GST (Goods and Services Tax) have taken an additional toll on small businesses, which contributes to as much as 40 percent to the country’s exports. At one point, under GST, small companies needed to file tax returns every month. While it may sound nice in terms of countering tax frauds, it meant additional cost for smaller businesses. Due to lack of sufficient planning, the government had to change GST rules many a time since its implementation last year.

Not just that, a major banking scandal unraveled at the nation’s second largest state-owned lender, where Letters of Undertakings (LoU) were issued to several businessmen without proper procedures. At the center of the scam is billionaire diamond jeweler Nirav Modi, his wife Ami, brother Nishal and maternal Uncle Mehul Chinubhai Choksi. The amount in question has already reached an eye-popping $2 billion and this is just the tip of the iceberg. Several companies and businessmen have taken up huge loans during the era of ultra-easy money after 2008/09 from state-owned banks and have either defaulted or fled the country. The latest PNB scandal could cost the second largest state-owned bank $2 billion. The amount could even be higher as the bank continues the investigation. Banks on the other, hard faced with huge non-performing assets have charged retail customers higher interest rates squeezing the so-called middle-class citizens.

In addition to that, in order to make the fiscal deficit look more palatable for foreign investors, the government increased taxes on petroleum products and the consumers of India couldn’t enjoy lower oil prices of the 2014-16 period. With oil prices rising since 2016, India is once again faced with higher energy bill and a squeezed middle class.

The above narration is only a brief of the really troubled story and it makes us at FxWirePro not so optimistic on India. Now, add the possibility of a trade trouble, if not war with the United States, which is India’s main source of export revenue into the mix, which makes us more bearish on India.

Trade idea:

Since topping around 11150 area in January, India’s benchmark stock index, Nifty50 has declined around 10 percent and is currently trading at 10170 area. We expect a further decline in the index and possibly another 10 percent or more decline.