No easy fixes for stock market woes

No easy fixes for stock market woes

Blame a combination of global and local factors.

In one month, the Sensex and the Nifty 50 have slumped nearly 9%. According to data provided by Bloomberg, India is the worst performing market in an area that spans China, down 3%, Australia, down near 5%, Indonesia and Singapore, less than 2%. Bangladesh has lost only 1.82% of market value in a month, while the Thai market has actually gained 1%. There are many reasons for the rout in Indian stocks, and these are not going away anywhere in a hurry.

India is part of the interconnected global financial market. The US market tanked on Wednesday, the Asian markets fell in sympathy on Thursday and India’s market followed. The US market went down for multiple reasons. The economy is doing well and the US central bank, the Fed, has been raising interest rates, reversing its earlier policy of quantitative easing. However, if quantitative easing was done by buying trillions of dollars worth of bonds off bank books, its reversal does not entail a symmetric sell-off of bonds. Such a sell-off would have sucked in the liquidity manufactured to combat the global financial crisis, while also raising rates. Raising rates via policy announcements, while keeping the liquidity created intact, adds to the volatility of currency flows from emerging markets back to higher-yielding US market. Excess liquidity in the markets has created overvaluation of assets, with price-earning ratios wholly out of line with reality. Stock prices are ripe for a correction and any adversity can trigger correction. This is the story across the world. Trump’s Iran sanctions have pushed up oil prices and trade war with China threatens slowdown.

India’s banking crisis has been unwinding, but then the mess in shadow banking, spearheaded by IL&FS, blew up. These have to be managed. The falling rupee depresses dollar earnings for foreign investors, also hit by a long term capital gains tax. Growth has to be kept up by keeping public investment high, but any slippage on the fiscal front would spook investors. The challenge is daunting, in an election year. There are no easy fixes.