At the start of the year, there is a natural human tendency to gaze into the crystal ball and figure out what the year ahead holds for us. I will not try to duck this trend by pretending I am above this forecasting epidemic. Future developments may end up squirting egg-yolk on my face, but I can’t resist making predictions for the economy, the markets and for investors in the coming year. So, here it comes.
GDP growth: Without doubt, GDP growth in 2015-16 will be much better than this year’s expected rate of 5.3-5.5 percent. With the possible exceptions of a severe drought or a political mess, I think we should be looking at 6 percent growth next year – plus or minus 0.2 percent. The signals are all positive.
Inflation: Thanks to soft global oil prices, inflation may remain low. Brent crude, which is our import benchmark, is at $57, and with the US ending the ban on shale oil exports, it is difficult to see how the oil glut is going to vanish too quickly. Only if oil shoots past $80 for several months, or we have a year of very bad rainfall, will inflation rise again. In November 2014, the Consumer price index was at 4.38 percent and the wholesale prices index at zero. They may rise slightly in the coming months, and then fall again. My expectation is that CPI will be in the 3-6 percent range in 2015-16, and WPI in the 2-5 percent range.
Interest rates: Broadly speaking interest rates will fall after April 2015. This means your deposit and loan rates will start falling, too. So rush to invest in bank FDs. The top fixed deposit rate could fall to a range of 8-8.5 percent in a few months, and home loan rates could fall below 10 percent for fixed rate loans. Flexible home loans will be even cheaper. Lending rates for companies will fall once banks are adequately recapitalised.
Stock markets: If the budget is good and the ordinances to allow more FDI in insurance, ease the land acquisition bill are passed by parliament, the stock market will continue to boom. The markets will be looking for clarity from the budget on whether goods and services tax will be implemented from 1 April 2016 or not. If these things happen, the BSE Sensex will hit 30,000 at least during the year, and rise higher if the reforms are better than expected. FII flows will remain strong. Money from provident funds may also come to the markets. So stay invested.
Mutual funds: Given the likelihood of a stock market rise, investors with the ability to take risks should invest more in equity mutual funds than debt funds, but in 2015, both equity and debt funds may deliver good returns in a falling interest rate regime.
Real estate: Real estate in some markets – especially suburbs – may start picking up after interest rates fall, but overpriced markets like Mumbai and Delhi NCR will not find sales growing easily. Builders will concentrate in building smaller, more compact, flats to make prices reasonable for buyers. But broadly, real estate remains unaffordable in most cities, and a further price correction is unavoidable. So real estate may not deliver good returns, unless you are an expert.
Gold: The international gold market looks unlikely to pick up as economic growth revives in the US. Domestic gold prices will stay range-bound for most of the year as long as there is no increase in import taxes or restrictions. Gold is unlikely to be a good investment in the short term, but it is always a good idea to keep some of it in your portfolio as a long-term hedge against inflation. However, if inflation slows, gold will lose more shine. But that’s always a signal for Indians to buy more.
The rupee: Thanks to low oil prices, India is a major beneficiary in terms of lower import bills and an improved current account deficit (the gap between external earnings and expenses which has to be bridged by capital flows). This year, the rupee fell around 3 percent against the US dollar, but Goldman Sachs says that in 2015, the rupee will be stable, if not appreciate marginally against the US dollar. In fact, during 2014, the rupee gained against the euro, the yen, the Swiss franc and the British pound.
My own assessment is that if the current account deficit is within 2 percent, if inflation is below 5-6 percent, FII inflows are in the range of $30-50 billion, GDP grows at 6 percent, interest rates are falling (but do not fall more than 0.5-0.75 percent in 2015), the rupee will remain stable. And yes, the Modi government has to accelerate reforms in the first six months of the year, before the election season starts again.
A lot can change between now and December 2015, but if nothing very bad happens, 2015 is going to be better than 2014 in the economic sphere for India.
Updated Date: Jan 02, 2015 19:41 PM