The unprecedented demonetization decision and the implementation of GST have pushed the recovery by some more quarters. It was expected that the market would recover from demonetization in few months and the transition to GST transition would be smooth. And so, investors pumped money into the equity market which led to high valuation. But as the market is yet to recover from demonetization and the GST transition is also not smooth, the investors are lowering their expectations leading to profit booking in the market.
Investors, particularly FII, fear that government might compromise the fiscal deficit target to give stimulus to revive the slowing growth. Any alteration with fiscal deficit target could shatter the confidence of foreign investors which could trigger the further selloff, considering the stretched valuations.
The FIIs continue to ditch the Indian market as the US Fed has announced the unwinding of stimulus and is expected to hike the interest rate in the December 2017 meeting. The US Dollar will strengthen further because of the interest rate parity. In addition, it is expected that the government will give a stimulus to revive the economy, which could compromise the fiscal deficit target,adding further weakness in the Indian Rupee.
The Crude Oil price has gained by ~9.5% in the last 1 month and investors fear that it could widen the current account deficit accompanied by the depreciating Indian rupee as the country imports ~80% of the oil it consumes. The Brent Oil price is hovering around 21 months high. In addition, the government is already under pressure over high petrol/diesel prices despite the fact that crude oil prices have halved over last 3 years. Any cut in the excise duty could also impact the fiscal deficit.