May, the BJP government bagged the largest single-party mandate since 1984, helping the Sensex past the 25,000 level and driving overseas investors to India.
A report by Bank of America Merrill Lynch, however, warns that India faces two headwinds that could lead to near-term consolidation in the markets. First, worries that the El Nino system could lead to a poor monsoon. “We believe this will hurt both GDP growth (could be lower by 50-75 bps) and inflation (could rise by 200-300 bps),” the report said. Second, the strife in Iraq poses a risk to inflation as well as current and fiscal deficit. The brokerage estimates 50-75 bps higher inflation for every 5% change in oil prices. Also, every $10 increase per barrel of oil could increase the current account deficit by 0.4% of GDP and the fiscal deficit by 0.2% of GDP.
Brent crude oil prices eased on Wednesday and were ruling at $111.59 per barrel at 6.00 pm IST. International crude oil prices had shot up to a nine-month high last Friday as militants linked to al-Qaeda moved south toward Baghdad. Iraq is Opec’s second-largest oil producer.
India’s Asian peers were trading higher on Wednesday. South Korea’s Kospi and Hang Seng indices gained the most by 0.81% and 1.55%, respectively. Among the major European indices, the FTSE 100, the CAC and the DAX were all trading marginally in the green at about 5.00 pm IST.