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Could India’s economy finally be on the up and up? Finance Minister Nirmala Sitharaman seems to think so, supporting her optimism by pointing out concrete evidence that includes, “Widespread vaccine coverage, gains from supply-side reforms… robust export growth… and… capital spending.” The Minister, however, admitted that actual results will depend on Covid-19 staying within controllable limits. For the last year, India has been struggling with the effects of the pandemic, and some disapprovals were voiced in 2021 when Prime Minister Narendra Modi’s approach to the country’s health-care challenges seemed ineffective. On a single day in early January 2022, 141,986 new Covid cases were reported. There is, at present, a vaccination program operating, but rural areas like Uttar Pradesh often find themselves with inadequate medical provisions.

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Still, in the fiscal year starting in April 2022, Gross Domestic Product may expand by 8.5%, after growing by 9.2% in the current fiscal year. In the opinion of the International Monetary Fund, it is likely that the following year will see continued growth. India is neck-and-neck with China in the race to be the quickest-growing major economy in the world, and India is likely to win the title “And keep it for at least another two years”, suggests Bloomberg. India has been battling a high level of unemployment for the last two years, but “The private sector is showing some signs of recovery”, says Chandrajit Banerjee of the Confederation of Indian Industry. The central bank is going to be slowing pandemic stimulus and implementing various measures to boost the economy, while investment in public infrastructure is viewed as crucial because “It can really ignite the sector where we see weak demand”, said Banerjee. Let’s take a closer look at some of the factors that may be at play in determining India’s immediate economic future.

Not Entirely a Rose Garden

Both the Nifty 50 and Sensex indices had a good start to 2022, rising more than 10% from low points the previous month. However, in mid-January, traders saw the Nifty 50 sink more than it had in a month. Prompted by concerns about increasingly hawkish central bank policy, traders sold off shares in IT firms, car makers and producers of metal, sending the index down by 1.07% to 18,113.05. Traders were “Coming to terms with the quicker pace of rate increases, which has put the brakes on a runaway rally”, explained Rajeev Thakkar of PPFAS Mutual Fund.

When January was closing off, IT stocks grew popular again and crude oil prices were higher, giving a 5% lift to the Oil and Natural Gas Corp, so that the Nifty 50 was up 1.3% to 17.325. At the same time, though, foreign investors were selling off a lot of local shares, and these amounted to $7.9 billion since September 2021. Anticipation that the US Federal Reserve might tighten policy more than expected encouraged the sell-off. “It makes sense for investors to take out some money after such an unprecedented rally”, suggested Amit Kumar Gupta of Adroit Financial Services. 

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Nirmala’s Strategy

One thing the Finance Minister has done to nourish local manufacturing and inject India with employment opportunities was to raise duties on a range of imported goods, including solar panels, solar cells and headphones, by around 20%. These changes were set to come into action on February 2nd and April 1st.  In early February the Reserve Bank of India announced the launch of its own digital currency and had also decided to impose a 30% tax on transferred crypto assets. Although the tax might draw some traders away to crypto platforms in other countries, “Imposing the tax rate makes crypto trading official now and any concern of a ban is off the table”, declared Darshan Bathija of crypto platform Vauld. 

Early in February, some traders grew concerned when the extent of the Finance Minister’s borrowing plan became known. “India’s government is borrowing unprecedented amounts of money just as its central bank runs out of room to buy more bonds”, reported Bloomberg. In the six months leading up to September 2021, the Reserve Bank bought 2.4 trillion rupees worth of bonds as part of its quantitative easing program, but stopped in October. With worldwide inflation on the rise and central banks feeling hawkish, “Macro risks from a global tightening cycle would be a key concern”, said Prabhat Awasthi of Nomura Holdings.

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Times Ahead

India’s most heavily populated state, Uttar Pradesh, was due for elections on February 10th, and these “Will be seen as a barometer for national elections due in 2024”, wrote Reuters. In the coming months it will be interesting to watch the price performance of key indices like the Nifty 50, which help indicate the relative economic health of the country—the volatility of which could provide both investment risks and opportunities for CFD traders. To gauge the trends to come, traders will need to watch central bank policy very closely, as well as the battle of India’s health care system to keep Covid-19 under control.

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