Factors that can harness Nifty’s free fall

Publish Date: October 10, 2018

This is the fourth article of a four-part series that focuses on how the markets will fare in the coming months.

Part 1: Here’s why you should keep your eyes glued to the Nifty this week
Part 2: Reasons why Nifty is walking a tightrope
Part 3: Large-caps or mid-caps? Stock-picking in times of trouble

Nifty-50 has been down in the doldrums for the past few weeks. The National Stock Exchange’s benchmark index has suffered deep cuts due to the following reasons:

- Falling rupee: The rupee has been trading at near all-time lows for the past few weeks. Since the start of 2018, the rupee has shed nearly 14% of its value against the US dollar. As a result, Nifty has taken hit — the index has shed 25% of its value in dollar terms. (You can read the second part of the series to understand the ramifications of a plummeting rupee on the stock market)

- High global crude prices: Oil prices have increased considerably in the last few months. Last week, it hit a four-year high of $86.74 per barrel. Consequently, petrol and diesel prices have spiraled in India. In many parts of India, petrol prices have skyrocketed past Rs 90 per liter. The situation can get even worse in the next few weeks following the US sanctions on Iran. If India decides to stop buying oil from Iran, the cost of petrol may rise even further. The reason? Tehran offers oil at the best possible price to India.

- Rising bond yields: India’s ten-year bond yield has risen in recent days, which is bad news for India’s equity markets. That’s because when bond yields increase, they become an attractive option for investors. People pull out their money from the relatively-risky equity markets and start investing in bonds. In short, when bond yields increase, equity markets usually suffer and vice versa.

- Strong capital flight: A falling rupee has spooked foreign investors, prompting them to pull out their money from the equity markets. In September alone, foreign capital outflows amounted to nearly $3 billion from India’s equity and debt markets. The heavy capital outflow has rattled the Nifty because foreign investment is very important for any emerging market.

These are some of the reasons why the Nifty has been in the eye of the storm of late.

September, especially, was a cruel month for Nifty — the index declined 6.4%, which is the worst monthly performance since February 2016. To be fair, October hasn’t started in the most auspicious of notes either.

So, how to stem the rot?

1) Government intervention: The Reserve Bank of India surprised most people by not raising the lending rates earlier this month. (You can read — RBI’s surprising decision to not hike rates — to understand how lending rates can offer a short-term solution to the rupee problem). This has put the onus on the government now. Although they have taken some initiatives in the last few weeks, that hasn’t stalled the rupee slide. The government may have to take stronger measures to ensure the rupee’s slide doesn’t enter the red zone.

Related read: Government initiative to revive the rupee

Related read: Import duty hiked by government to halt currency slide

2) Lower oil prices: Global crude oil prices — hovering around $84 per barrel right now — will need to go below the $70 mark. Anything above $70 per barrel is uncomfortable for the Indian economy. That’s because higher price for oil inflates import oil bill. Some estimates reckon that India may have to pay an additional $26 billion to foot the oil bill alone! (You can read the second part of the series to understand why high oil prices can impact India’s economy)

3) Foreign capital inflow: The confidence needs to flow back into the equity markets. As mentioned earlier, foreign investors have become wary of Indian markets now. They now see more sense in investing the US dollar than the Indian rupee. This needs to reverse. That’s because a stronger rupee would help Nifty’s value in dollar terms.

4) Higher GST collection: The headline GST collection data — an average of Rs 94,000 crore per month — may look impressive. But that won’t pass muster if the government wants to keep its promise of keeping the fiscal deficit and current account deficit (CAD) under control. To do this, the government’s GST collection will need to be around Rs 1.2 lakh crore in the second half of FY2019. Keeping the current account deficit in check is very important for the economy in the long run. If the government manages to achieve its CAD target, it will renew confidence in the equity markets.

Related read: Why GST collections need to improve every month from October

5) Narrower trade deficit: The trade deficit — $18 billion per month currently — will have to decline considerably. A $12-13 billion trade deficit would be more comfortable for the Indian economy. That’s because a slimmer trade deficit would help in reducing the current account deficit.

Related read: What does high current account deficit mean to investors

To sum up, a Nifty turnaround may not be around the corner just yet, but these factors will have to fall in place for the markets to bounce back in future.

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