On Friday, Indian shares plunged nearly 4%, their sharpest drop in 10 months, as a spike in US government bond yields walloped stocks worldwide.(MINT_PRINT)
On Friday, Indian shares plunged nearly 4%, their sharpest drop in 10 months, as a spike in US government bond yields walloped stocks worldwide.(MINT_PRINT)

Weak Q3 data likely to drag stocks further

After two quarters of contraction, India’s real GDP grew 0.4% in the December quarter, but analysts said the lower-than-expected nominal GDP growth has heightened the threat of a sovereign downgrade.
By Nasrin Sultana
PUBLISHED ON MAR 01, 2021 07:10 AM IST

Bond yields, geopolitical tensions and news around the US stimulus programme are expected to keep Indian stocks volatile, even as the economy makes an uneven recovery from the pits of a recession.

On Friday, Indian shares plunged nearly 4%, their sharpest drop in 10 months, as a spike in US government bond yields walloped stocks worldwide.

After two quarters of contraction, India’s real GDP grew 0.4% in the December quarter, but analysts said the lower-than-expected nominal GDP growth has heightened the threat of a sovereign downgrade. Weak GDP growth in a quarter of strong corporate earnings, goods and services tax (GST) collections and high-frequency indicators data also indicate that the informal sector is yet to emerge from Covid shock, they said.

“Nominal GDP growth at 5.3% in Q3FY21 may increase the risk in a sovereign downgrade by global rating agencies. As the unorganised and informal sector is still struggling, it will take some more time for a full recovery of the Indian economy. However, the rise in US bond yields may see foreign institutional investors (FIIs) dumping Indian debt instruments, which will weaken the Indian currency. These may not augur well for the Indian markets and, hence, we anticipate further corrections for some more time,” said Deepak Jasani, retail research head of HDFC Securities.

India’s services sector contracted 1% in the December quarter, with only financial, real estate and professional services performing better. Sectors such as education, hotels, restaurants and travel and tourism, which are yet to open up fully, may suffer due to sporadic lockdowns, experts said.

The contraction in private and government consumption has raised worries as well. “Consumption expenditure, however, was a laggard (down 2.2% year-on-year) in Q3FY21, led by a contraction in both personal and government consumption. The 1.1 percentage points contribution by discrepancies to GDP in 3QFY21 is the highest in FY21 so far,” said analysts at Motilal Oswal Financial Services.

Despite the festive season pick-up, private final consumption expenditure continued to contract, trailing the performance of investment and government spending, Aditi Nayar, principal economist, ICRA Ltd, said, adding that she expects consumption growth to strengthen only modestly in the near term.

Analysts said that for the market rally to continue, overall economic revival and sustaining corporate earnings is crucial. “From an equity market perspective, revival of economic growth and the impact of the same in terms of improvement in the corporate earnings trajectory would be one of the key variables to watch out for,” said Shibani Kurian, head of equity research, Kotak Mahindra Asset Management Co.

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