The global risk aversion caused by the sudden devaluation of the Chinese currency (Yuan) during the second week of August had triggered a massive sell-off in global financial markets resulting in equities, commodities and emerging market currencies hitting their multi-year lows. Global investors dumped riskier assets and sought the safety of US treasury bonds on fears that a slowdown in China, world’s largest consumer of raw materials, could seriously undermine the growth prospects of several commodity-producing countries, which could derail the global economic growth. India was no exception to this global rout. On August 24, the 30-share BSE Sensex suffered its biggest crash in almost seven years and the rupee plunged to its lowest level since early September 2013.
The steep fall in domestic equities wiped out almost Rs 7 lakh crores of investors wealth in a single day. During this month, foreign portfolio investors (FPI) have pulled a net Rs 14,019.89 crore or $2.11 billion from the domestic equities registering their biggest monthly outflow since June 2013. However, since June 12, 2015, when the Chinese stock market bubble first burst triggering panic selling in global financial markets, the Indian equity markets and rupee have managed to limit their fall and outperform their global peers till date.
While India can’t remain completely immune from what is happening in the global markets, there is still a near consensus view among economists that India’s macro-economic factors are now in a much better position to weather the current crisis as compared to other emerging economies.
India’s exports to China accounted for just over 5 per cent of its total exports in 2014 whereas it was as high as 25 per cent for Indonesia, 30 per cent for South Korea, 15 per cent for Thailand, 22 per cent for Brazil and nearly 10 per cent for Russia.
“The Chinese led global growth slowdown will impact Indian exports to an extent. However, India is largely a domestic demand-driven economy. At the moment, the biggest positive for India is the fall in global commodity prices, which will ease domestic inflation and spur consumption demand. The capacity utilisation in the Indian manufacturing sector was just 75 per cent during the fourth quarter of FY15. The pickup in consumption demand will increase the capacity utilisation in Indian factories. This will be followed by investment-led growth when companies (domestic as well as foreign) start investing in greenfield projects,” said Devendra Pant, chief economist, India Ratings.
India had already overtaken China to become the fastest growing economy in the world. During the first quarter of this calendar year, India’s GDP rose 7.5 per cent as compared to 7 per cent growth recorded by China. According to an estimate by International Monetary Fund (IMF), India will register a growth of 7.5 per cent in 2015 while China’s growth will slowdown to 6.8 per cent. Meanwhile, Russia and Brazil are expected to see a contraction in growth by 3.4 per cent and 1.5 per cent respectively, while South Africa is likely to grow by a modest 2 per cent.
The last time India stared at a similar crisis was in 2013 when FPIs exited India and other emerging markets amidst fears about the withdrawal of quantitative easing programme by the US Federal Reserve. The global crude oil prices had then climbed above $100 per barrel due to the strife in West putting pressure on India’s fiscal and current account deficit. The rupee tumbled to a record low of 68.80 per dollar and was the worst performing currency among the emerging markets.
Back then, India’s growth was slipping below 5 per cent, reforms were stalled, foreign exchange reserves was shrinking, inflation was inching higher and the current account deficit (CAD), the amount by which a country’s foreign exchange earnings fall short of its import bill, had crossed over 5 per cent of the gross domestic product (GDP). A part of this deficit was financed using the foreign portfolio inflows into the stock market making India more vulnerable to such external shocks. All these factors made foreign portfolio investors shy away from India.
However, during the last two years, India had made considerable progress in all these fronts following a series of measures taken by the Reserve Bank of India (RBI) and the government. The growth is now back on track, inflation has come down and the foreign exchange reserves have swelled to $354 billion giving RBI enough ammunition to intervene in the market in case of steep fall in rupee. Additionally, the CAD shrank to $27.5 billion or 1.3 per cent of GDP in FY15. Interestingly, for the first time in India’s history, the net foreign direct invest (FDI) at $32.6 billion exceeded India’s CAD during FY15, helping India to finance its import bill using long-term capital. And global crude oil prices are now trading just above $40 per barrel, significantly cutting down India’s total import bill.
Will these factors help India to stand out from rest of the emerging markets and attract higher capital inflows? The answer is yes, once the global market stabilises and the government goes ahead with key legislations like the Goods and Services Tax (GST), which is estimated to add about 2 per cent to India’s GDP growth.
According to market pundits, global funds are currently facing huge redemption pressure from their clients forcing fund managers to liquidate their equity market holdings. They added that sovereign wealth funds, one of the biggest investors in emerging market equities over the last few years, are also trimming their exposure as oil producing countries are facing severe pressure due to the steep fall in oil prices.
“The emerging markets as an asset class have lost their appeal among global investors. So capital allocation to emerging markets is going to see a dip and to that extent, the capital inflows into the Indian market would also get impacted. However, if investors are willing to take some risk on emerging markets, India will definitely receive a higher allocation,” said U.R.Bhat, managing director, Dalton Capital.
“India’s macro-economic factors are far better than other developing economies. If the government is able to deliver on its promises by improving the ease of doing business, India could see more FDI’s in coming months. Similarly, implementation of long awaited reforms like the GST bill would help increase the confidence of global investors in the Indian market,” said Gopal Agrawal, head of equity at Mirae Asset Global.
One of the positive developments during the current meltdown is the emergence of domestic institutional investors as a major player in the Indian market. This according to experts had helped Indian markets withstand heavy selling by FPI’s.
