Monday, 24 August 2015

Global Economic Slump : How should India react

Today a major breakdown has been seen in the Indian market where SENSEX fell to nine year lowest mark. The BSE Sensex fell around 6 percent on Monday to its lowest in a year, as a rout in Chinese equities sparked widespread unrest in global financial markets. RBI Governor Raghuram Rajan reacting to Sensex falling over 1000 points and rupee tumbling to two year low said that the central bank will intervene when needed. He further said India is in better position relative to many other economies. Below are the reasons why Sensex fell over 1,600 points today

1. Global markets and China stocks crashing:
Weak Chinese manufacturing data on Friday, China markets cracked over 9 per cent in trade to register its lowest level since March, as formalisation of rules allowing pension funds to invest in the stock market over the weekend failed to lift sentiment. Over the weekend, China allowed its $547 billion pension fund, the world's largest, to be invested in its volatile stock market. Market disappointment over the lack of a liquidity move by the central bank during the weekend triggered a fresh selloff, said a Reuters report quoting traders.
Global equities markets have seen more than $5 trillion wiped off their value since China's shock devaluation of the yuan on August 11 which sparked fears the world's second-largest economy is weaker than thought, said the report.

2. Indian rupee fall:
Indian rupee fell to two year low and plunged by 66 paise to trade below Rs 66 level against the dollar for the first time in almost two years in opening trade on sustained capital outflows even as the US currency weakened overseas.At the Interbank Foreign Exchange Market, the rupee fell by 66 paise to 66.49 a doller in early trade.

3. Crude prices:
Crude prices fell after slipping below $40 barrel for the first time in six years after weak Chinese manufacturing data.
Dipen Shah, head of private client group research, Kotak Securities, said, “The global risk off trade has impacted Indian equity markets also. India, however, derives some positives from the current global meltdown. Brent crude, at $44 per barrel, will ease the current account deficit further, which will also have a positive impact on inflation. This will be a serious positive for several Indian companies. The rupee depreciation will also be positive for exporting sectors and companies, especially the ones which have large exports to US. Thus, beyond the current sell-off, markets will likely focus on sectors which benefit on a fundamental basis. On the macro front, passage of crucial reforms bills like GST will make India stand out among emerging markets and we need to wait and watch out for the same.”

4. Sharp selling by foreign investors:
Overseas investors have pulled out nearly Rs 2,000 crore from the Indian stock markets since the beginning of August, amid concerns over Chinese economy coupled with sharp erosion in the value of rupee. The net outflow by FPIs in equities stood at Rs 1,943 crore during August 3- 21, while they invested a net sum of Rs 79 crore in the debt market during the period, which works out to a net outflow of Rs 1,864 crore, according to depository data. Investors are worried that a key reforms bill on goods and services tax ( GST) might get delayed as the government failed to pass it during the monsoon session of Parliament, said a PTI report.

Will India get trapped or use it as an opportunity
A slowing world, experts believe, also presents the biggest opportunity for India to emerge stronger and consolidate its position among peers, indeed only if the country manages to set its house in order. A slowing China, weak recovery in the US and troubles in Europe shift the global focus to Asia and India has much better chances to emerge as the winner among its peers. The country has all base conditions right for a growth rebound with international crude oil-prices at six-year lows, cheaper commodity prices, strong economic fundamentals and much stronger forex reserves kitty (over $354 billion).

The bottom line is this: If the government acts with urgency and push ahead the reform promise, a slowing world is a big opportunity for India to consolidate its position and emerging stronger out of the crisis.

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