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5 challenges markets face in 2015
The Sensex rose 30% in 2014, making it the second-best performing benchmark in the world. It is widely expected to continue its bull run in 2015 too. That said, some risks remain that may cause corrections from time to time. These risks need not necessarily be cause for concern. In fact, wise investors often wait for the market to fall to buy at cheap prices.
Here are five risks to look out for in 2015:
Rise in US interest rates:
The biggest risk to the bull-run in the markets is an increase in interest rates by the US central bank Federal Reserve. Since the 2008 financial crisis, the US central bank had kept interest rates at near-zero levels to stimulate growth. US investors took advantage of this to borrow at cheap rates and invest in emerging markets like India. A rise in interest rates would mean loans become costlier for US investors. As a result, they may look to exit investments in India and other emerging markets. This could cause a temporary fall in the markets. After all, foreign investors are the biggest players in the Indian market. FIIs hold nearly 50% of the non-promoter shareholding in the Indian markets, according to SEBI data. An increase in selling activity leads to a fall in markets.
The US currency has been strengthening against a basket of currencies in the last many weeks. One reason is the fall in oil prices. Traditionally, the dollar strengthens whenever the price of oil falls. Secondly, the US economy is showing signs of improvement. This is making investors optimistic about the US currency. However, a continued strengthening of the dollar is bad for the Indian rupee. The depreciation of the Indian currency pushes up prices of India's imports and leads to a rise in inflation. Moreover, the markets fall when the rupee starts depreciating as FIIs look at exiting to cut their currency losses.
India is a net importer. This has led to a wide current account deficit - the amount India owes to the world in foreign currencies. To reduce this gap, exports have to increase. This would happen only if foreign countries progress, including Europe. A continued slowdown would be detrimental to India's exports. Moreover, the slowdown in Europe is one of the key reasons for the 40% fall in oil price. If oil price falls further, India's trade partners that export oil would be in more trouble. That could impact India's exports to these countries thereby hurting our trade balance.
One of the biggest events looked forward to this year is a cut in interest rates by the Reserve Bank of India (RBI). Markets have been calling for an interest rate cut for months now. This helps companies borrow easily and thus stimulates growth. Hopes for the rate cut are based on a fall in inflation - the rise in prices over time. Inflation growth fell throughout 2014. In November, wholesale price inflation grew 0%. Any reversal of this trend would mean the RBI could hold rates, this is bad news for the markets
India growth and reforms:
Share prices in India have run in anticipation of revival in economic growth due to big bang reforms. However, if the government is not able to meet that expectation, it could hurt the stock market sentiment. For this reason, the Union Budget in February is being closely eyed. If the Budget turns out to be disappointing or the economy takes a longer time to grow, markets could trend lower.
The rupee depreciated by 6% in the second half of 2014. This is because of the strengthening of the US dollar. This depreciation reduces the benefits of the drastic fall in oil price on India's import bill.