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India Catches Global Flu
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The global cue for the sharp falls — there were several — was fear: of US sovereign rating downgrade (after 70 years), and Europe's continuing troubles. The week started on a bad note: on Monday, 8 August, The Bombay Stock Exchange Sensitive Index (Sensex) fell below 17,000 for the first time in 14 months. When markets closed on 10 August, the Sensex lost about 1.2 per cent, in three out of four trading days; from 1 to 10 August, the market has lost 1,255 points or 7 per cent in eight trading sessions.
It is not just India. According to the MSCI Index, equity markets across the global have lost between 4 and 25 per cent: Russia, Brazil and China lost 23 per cent, 16 per cent and 13 per cent respectively. Foreign institutional investors (FIIs) led the selloff; in the first 10 days of August, FIIs sold $1.37 billion of stock.
Is this a bear market? No, says Gurunath Mudlapur, managing director at Atherstone Capital Markets. "But for some time there will be capital flight," he adds. "We can't ignore the slowdown we are in. GDP growth expectations have dropped to 6.5 per cent in some quarters."
Kaushal Aggarwal, co-founder and managing director at Avendus Capital agrees. "It's clear there's a structural problem in the US and Europe and it will take several years for them to come out of their turmoil," he says. "And this will hurt India in the near-term; exports will be hit, by a combination of the slowdown and dollar depreciation."
The slowdown will not get better soon either. On 10 August, the Reserve Bank of India (RBI) made it clear monetary policy will remain tight. That means that most people expect inflation to get higher; so high interest rates will be around for a while.
The latest index of industrial production numbers released on 11 August suggest that the pace of economic growth could get even slower; corporate investment and consumer spending remain subdued (consumer durables, for instance, grew just 1 per cent in June 2011, compared to 21 per cent plus in June 2010.
True, the market's performance depends more on liquidity (read that as FII flows) than it does on economic conditions. "If you look at the Sensex, it is roughly at the level it was three years ago," says Aggarwal. "Corporate performance has jumped 45-50 per cent since then, so you can argue that the market is relatively cheaper. But it isn't; even among the blue-chips you have to be selective."
On Thursday, the US markets bounced back; the Dow Jones Industrial Average (the Dow) went up by over 400 points. But those who hoped for a pass through of that seeming optimism to Indian markets were disappointed. The Sensex lost another 210 plus points.
What stands out in the way markets have behaved in the past two weeks has been the degree of volatility. The ups and downs across markets around the world resemble a yo-yo more than anything else; and there are few signs that the volatility will abate over the next six months.
What does that mean for Indian markets? As the economy slows further — and the threat of a less than average monsoon looms large — inflation and interest rates are going to hit corporate margins and corporate profits. Already, auto sales have started to decline a little sharply, in the face of higher costs that have been passed on to consumers.
Above all, there is one thing that markets have in abundance and that they hate most: uncertainty. It is going to be a bumpy ride.
(This story was published in Businessworld Issue Dated 22-08-2011)