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What is troubling India’s financial markets
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$40 billion
The sell-off by investors in the NBFC sector has erased more than $40 billion in market value in only three days. This has culminated in the Sensex losing nearly half of its total year-to-date gains. It is now headed for its worst monthly performance in two and a half years and as a result, India loses the top-spot of Asia’s best performing stock market for the year according to an article by Livemint.
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Publish date: 28th September, 2018
To say that the past one month was eventful would be an understatement. The BSE S&P Sensex and Nifty have shed 5% each. Small and mid-cap benchmarks are down more than 10% while bank shares have witnessed a hammering.
The Indian rupee has shed over 9% since April 2018. Shares of export-oriented companies like IT services and Pharma sector have gained ground as a result.
Click here to read more about the recent market volatility.
Global Trade War
The upheaval in global trade has triggered a rally in the US dollar. This is because the US government is looking to reduce the trade deficit with various countries. This means the US dollar will continue to rally as exports get a push and imports are pruned due to new tariffs. This has affected financial flows in capital markets. Investors are pulling out money from countries that are vulnerable to the negative impact of the global trade row. Recently, emerging markets have been facing the contagion effect of the burgeoning trade war between the US and China. Most of the emerging economies are facing currency depreciation. The Indian rupee is hovering around record lows. A persistent rupee depression impacts investor and trade sentiments negatively. India’s current account deficit is expected to widen over the next few quarters. This means the rupee is expected to continue to remain under pressure. As imports become dearer, businesses dependent on imported goods will see cost escalation. Click here to read about the impact on trade deficit on investor sentiments.
6 effects of rising crude oil prices on the Indian economy
Skyrocketing Crude Oil Prices
India imports 80% of the oil requirement. Recently, crude oil prices have hit 4 years high of $82.01 a barrel. Brent crude (major trading classification of light crude oil, and a benchmark price for its purchase worldwide) has hit its highest level since November 2014. It is a benchmark though India’s crude oil basket is a mixed one and priced lower. Despite the US boosting oil output, international prices continue to stay high.
Fuel prices on fire: The what, why, how and what now
High crude oil prices also affect the prices of essential commodities. Inflation negatively affects investor’s sentiments. Click here to read more about the impact of high crude oil prices on investor’s sentiments.
Liquidity concerns
Shares of Non-banking financial companies (NBFCs) saw a sharp decline last week. This was after the revelation of a series of delays and defaults on debt obligations by IL&FS, and the unsubstantiated rumour that DHFL defaulted one of its debt obligations. This triggered panic selling by investors amid the concerns of rising borrowing costs. Click here to read about how the recent DHFL and IL&FS issue impacted stock.
Foreign flows have dried up and domestic investors are also not investing like they were earlier. Interest rates are expected to rise in US and in India. A rate hike in the Fed policy does not spell out good news for emerging countries including India. It could mean a tightening of liquidity in the market. This can be a problem because the markets are already facing outflow concerns as a result of a weak rupee. Foreign investors have sold around $1.26 billion and $6.78 billion in the equity and debt markets respectively since the beginning of the year as per an article by Livemint.
