2-year delay of GAAR implementation and inflation dynamics!

The possible RBI rate cut rise scheduled later this January has gathered enough grounds with the country’s headline inflation slowing to its lowest level in three years. India has posted its most sluggish economic growth in a decade and rate cut is one of the boosters to growth. 

Part of the cause of the decaying economy was a fall in investment flows into India last year following India's moves to toughen tax collection by implementing The General Anti-Avoidance Rules (GAAR) from April 2014. The minimal amount applicable to fall under GAAR would be 30 million rupees; investors and companies, routing the said or more amount through tax havens such as Mauritius, are aimed at.

The Finance Minister P. Chidambaram announcing delay of the implementation of GAAR by another two years (i.e., to be effective from April 1, 2016), has had a positive impact in the Indian stock market. The economy may witness moderate boost following capital inflows owing to the move.

Biggest stock market rise since July 2011

It is a big surprise for investors of the Indian stock market with both the indices of the Indian bourses exhibiting the highest figures since July 2011 besides gaining for the eighth consecutive session. While nifty advanced 142 points to 5,578, sensex rose 443 points to close at 18,464.27 (September 14).

Several factors triggered the rise, the immediate effect being generated by the diesel price hike by the UPA government. Another major contributor was the monetary stimulus (new asset purchase program) of the Federal Reserve; its decision to launch a third round of quantitative easing (Q3) not only boosted Indian market sentiments but also worldwide.

Besides, to curb inflation, the Reserve Bank is expected to leave interest rates on hold. Due to deficient monsoon, food prices rose high this year, which further added to the inflation of 7.55 percent in August 2012.    

Amongst the biggest gainers in blue chip stocks were Reliance Industries and ICICI Bank. 

Languishing GDP growth!

It is no surprise to learn that in the quarter ending June, the GDP growth of India got weaker, exhibiting its lowest in three years, at 5.5 percent. With this exposure, there seems to be no respite for Prime Minister Manmohan Singh. The economic agenda that he created is no wonder paralyzed owing to a series of political scandals. And the coal scandal exposed by CAG has added fuel to the fire. As he is trying to escape those scandals, the GDP report for June Qtr acted as an eye-opener, hitting him worse!

Exports have been hit due to weak demand in the West. But such fluctuations do occur. It is lack of government reforms and overspending that has affected greatly the GDP growth. Investors hoped that the weak GDP growth would influence the RBI to lower interest rates at its next policy meeting to be held on September 17. But again the stubbornly high inflation has come on the way!

After the GDP data report, sensex recovered to about 80 points from it's lowest point of the day and Nifty too improved by 25 points from it's lowest point. However, due to fall in ICICI bank shares, sensex fell by 0.92% and nifty fell by 1.1%.