Share prices fell sharply across Asian bourses on Friday. The S&P BSE Sensex and NSE Nifty fell over 2% in line with other key markets. The Indian rupee is also volatile. However, while the two will gyrate, they are unlikely to fall dramatically.
Here are pointers that explain the volatility in markets:
1. FIIs selling, but mutual funds buying: Foreign institutional investors registered a net outflow of $2.5 billion in August 2015. This is the highest since October 2008. However, domestic mutual funds have picked up Indian shares worth $2 billion. The FII selling pressure has been negated to a large extent. The FII problem has got nothing to do with India or fundamentals of the Indian economy.
2. Growth slowing, but still strong: India’s growth was 7% in the quarter to June 2015. This was below 7.4% expected by the street. The change in methodology for computing growth earlier in the year hurt credibility among international investors. They may watch the trend in growth for a few quarters. Meanwhile, the IMF and Moody’s expect growth to hover around 7% in 2015-16. CRISIL, a rating agency, expects growth at 7.4% for 2015-16.
3. Forex reserves strong: The rupee may not fall significantly because of stronger macro-economic indicators. Foreign exchange reserves are sufficient to pay for 9.8 months of imports now than 7.4 months in 2013. This is the foreign exchange needed to pay when goods are imported. India’s forex reserves stand at $355 billion against $277 billion in 2013. A large forex reserve is good; it acts as additional security for the country.
4. India’s exports are not exposed to China: Less than 5% of India’s merchandise exports go to China. This is half of Indonesia and Thailand and fifth of Korea and Taiwan. The dependency of these countries on Chinese consumption is high, according to Kotak Securities, a Mumbai-based company. Indian software companies export largely to the US. The largest economy in the world is growing much faster than expected.
5. Short-term foreign debt falls: Two years ago, India’s short-term foreign debt stood at 44%. In 2015, it is down to 39%. This indicates less pressure on repayment and foreign exchange. This is good for the Rupee.
6. Current account deficit: The CAD or current account deficit, which is the money India owes in foreign exchange, is down to 0.3% in 2015 from 4.9% in 2013. The massive fall in commodity prices makes India’s imports cheap. The fall in crude oil prices means that India would pay less in foreign exchange for the commodity. Analysts say that every $1 fall in a barrel of oil saves $800 million in foreign exchange. A lower CAD is good for the rupee as the Indian currency would not be sold much to buy foreign currency.
7. Fiscal situation stronger: The fiscal situation is much stronger than in 2013. This is largely due to the fall in crude oil prices and major commodities that India imports. While the fall in oil prices has been dramatic, the Indian government has steadily cut retail prices of fuel. This means state-owned oil marketing companies are sitting on a significant amount of profits that could help the Indian government in spending on infrastructure.
8. Inflation: Consumer price inflation is closer to 4% in 2015 than 9% two years ago. While there are issues related to supply side constraints, prices are trending lower for major commodities. Food inflation remains elevated as reflected in prices of onion and yellow lentils (toor dal).
9. Interest rates: The Reserve Bank of India has clearly stated that it will monitor the inflation in the economy and then decide on cutting key benchmark rates. Industry experts suggest that borrowing rates a way to high than near-zero percent rates prevailing in developed markets. The high cost of borrowing for businesses and individuals pushes down demand for goods and services.
10. Monsoon:
While the monsoon in 2015 so far has been below par, analysts have not
yet expressed any fear of a slump in the rural demand. For example,
while credit demand in all categories is down as suggested by the RBI
data, there is a strong growth in personal loans. Rainfall deficiency is
at 12% as of 28th August and in line with the meteorological
department’s forecast for the whole season, according to CRISIL, a
credit rating agency.
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