India on High Ground in the Global Market Tsunami

Weakness in the Indian market is likely to be short-lived as the economy is resilient & commodity prices remain low

Is India Insulated?

• Market fears yuan will slide once Beijing withdraws support
• But unlike in 1994, this time Asian currencies are a lot more resilient
• Impact of China crash may be limited as participants largely local
• India more resilient versus other EMs, low oil prices an added benefit
• Indian investors should use this correction to consolidate positions

Indian markets lost Rs 7 lakh crore in a single day when markets across the globe tumbled like nine pins. The fall started with the US markets, which closed with a 500-point drop on Friday, amidst fears of a slowing Chinese economy. On Monday we saw China losing 9% which created a financial tsunami taking down every market in its way irrespective of their fundamentals.

Caught in this giant wave of selling were not only equity markets in various countries, but all asset classes. Major commodities were swept away along with an increase in volatility in the bond market.

Chinese Yuan Epicentre of the Financial Tsunami

But while equity markets grabbed headlines and limelight, the real action was in the currency space. That’s where the market rout started.

It all began when China decided to devalue its currency and said it would allow market forces to determine prices. But in a few days it became clear that the Chinese government continued to intervene and keep the yuan artificially higher. In fact, the divergence between the price in the open market in the US and the one that the Chinese government uses to announce the official rate increased. The market feels that the day the Chinese government withdraws its support to the currency there can be a sharper fall in the value of yuan.

It is in anticipation of this fall that global markets started correcting. Emerging market currencies were the most severely impacted. The recent mayhem in the currency market brought back memories of the Asian currency crisis of 1994, which was also triggered off by a devaluation of the Chinese currency. But this time around most other Asian economies are stronger and have learnt their lessons from 1994.

India Gets Drawn into the Tsunami

The Indian currency felt the selling pressure with the rupee touching the 66.74 mark against the dollar, a level last seen in September 2013. But the more visible carnage was in the equity markets, with the BSE Sensex crashing by 1,624 points or 5.94%.

A large part of the selloff was on account of foreign institutional investors (FII) withdrawing their money. According to data released by market regulator SEBI, FII’s sold over Rs 5,275.40 crore. Exchange traded funds (ETFs) have seen a renewed bout of withdrawals. Last week alone saw an outflow of $8.3 billion from emerging market ETFs, which was the highest in the last 15 weeks and the seventh straight week of withdrawals.

The rupee’s fall resulted in political mudslinging with the opposition using the opportunity to blame the government of not managing the economy well, whch they claimed triggered the depreciation. But the fact remains that the Reserve Bank in conjunction with the government deliberately decided to keep the rupee lower in order to make Indian exports competitive.

Back in September 2013, when the currency was around 67 to a dollar, India was among the few emerging economies which saw their currencies depreciate. It had more to do with the poor fundamentals of the economy and its vulnerable position on account of high fiscal and current account deficit, rather than any external factors. The present slide has everything to do with external factors rather than the domestic economy.

The Way Forward

Global markets are shaken on account of the Chinese economy slowing down and its government realigning the currency. The Chinese stock market fall has had limited impact on global markets as nearly all the participants in it are locals, and therefore the contagion could likely be contained. Participation in Chinese stocks by FIIs is through those listed in Hong Kong.

But the Chinese slowdown is reflected in its weakening currency. Since China was a major consumer of commodities, its slowing economy has impacted prices of these commodities. This in turn has impacted the countries producing these commodities.

Thankfully for India, a fall in commodity prices comes at a time when the government is thinking of increasing spending. Falling commodity prices, especially crude oil, helps the government reduce its import bill and cut the amount it spends as subsidy. The saved amount can be utilised in creating infrastructure and kick-starting the economy.

Further, Indian markets are in a sweet spot when compared with other emerging markets as it is one of the few economies that are expected to post robust growth. Rather than getting rattled by the short-term volatility on account of external situations, investors can use it to consolidate their position.

One of Warren Buffet’s mantra of getting rich is to be fearful when others are greedy; and greedy when others are fearful. Get ready to get greedy.

(The writer is a Mumbai-based market analyst)