Economy

Bloodbath on Dalal Street Rattles Indian Investors

The Bombay Stock Exchange Building (Photo by Appiah)

The Bombay Stock Exchange Building (Photo by Appiah)

The BSE Sensex plunged 5.9% on Monday (1,625 points), making it the largest single-day decline since January 7, 2009. The Sensex had gone on to shed 64% in just nine months during that period, and many stocks lost over 90% of their value. Monday’s bloodbath left investors poorer by over 7 lakh crore. Finance Minister Arun Jaitley sought to allay fears, promising that the markets would settle down and that the government and the Reserve Bank were watching the situation closely.

The Indian stock markets have been participating in the global rout that began at the end of last week. The global sell-off did not just include equities, but currencies and commodities as well.

The only recent negative news for India was a lowering of its growth forecast for 2015 from 7.5% to 7% by the rating agency Moody’s. This was unlikely to have contributed significantly to today’s crash, as the market was unaffected when it was announced last week.

Globally, the year has seen mixed economic signals, with the US economy recording a modest growth, and Europe also perking up before events in Greece dominated the news. The biggest concern had been the persistent decline in oil and other commodity prices, as they could be suggesting a fall in demand rather than an increase in supply.

Markets have largely reflected the global economic picture, with most (India’s included) remaining within a relatively narrow, sideways range before this crash. The only markets to decline sharply were those exporting oil and other commodities, including Australia, Canada, Brazil, Norway and the Middle East.

This equilibrium was disrupted by China, whose stock market unexpectedly went into a bubble at the beginning of the year. The bubble eventually burst in June, setting off a chain of event that is the most likely cause of the global mayhem now.

Yuan devaluation

Initially, the Chinese government took surprisingly dramatic measures to curb the decline, and appeared to have succeeded at first. Then it unexpectedly devalued the Yuan. That decision was ostensibly to pave the path for its currency’s inclusion in IMF’s SDR basket – by making the Yuan eventually market-driven. The more likely reason was that its economy badly needed an export boost.

Inevitably, other Emerging Markets – including India’s – brought their currencies down, too. The fall in currencies triggered off a decline in most EM stock markets, and the disequilibrium has led to the global rout.

The future is now quite uncertain, and will depend on whether economies continue to recover or whether the current turmoil in currencies and commodities would translate into downturns.

Markets had earlier shown considerable sensitivity to the suspense being created by the Fed over a rate hike, but this is almost certainly a secondary factor after the recent developments.

India is not immune to global downturns, as was made painfully evident back in 2008-09. Our government will urgently need to accelerate the pace of reforms if the stock market is to stabilize without too much further damage.

As far as the Indian markets are concerned, they are in a downtrend now, with the Sensex’s closing high dating back to January 29 at 29,682. And if Moody’s forecast for India’s growth turns out to be accurate, there is no immediate positive trigger for stocks, either. It is too soon to estimate the extent of a decline, which will depend on global economic growth and Indian economic reforms.

  • ashok759

    Two things the Chinese could have done differently, better. One, not allowed their currency to remain tied to the dollar when it was surging. The recent modest devaluation still leaves the yuan above where fundamentals would place it, hurting much needed exports. Second, not triggering a stock market bubble at a time when growth was already in trouble. The leadership needs to stabilise the economy and restore the world’s faith in its being on top of things. 2. For India, deep structural reforms offer the best hope to make it stand out in a world where emerging markets are falling out of fashion. The luxury of waiting till important state elections are out of the way by mid 2016 is simply not there.

  • NARENDRA M APTE

    (1) I wish to know whether globalization has created difficulties
    for stock markets everywhere. We must be prepared for volatility in stock
    markets and should be able to deal with such volatility with confidence. (2) We
    notice that industries like steel, automobiles and petroleum products have
    become highly vulnerable to global market conditions. I believe this is the
    reality and we must be ready to accept it with its likely impact on our
    national economy. (3) The latest crisis
    in stock markets the world over is just a reconfirmation of interdependence of
    national economies. (4) Would the Chinese meltdown lead to recession? Our Union
    Finance Minister was confidently claiming that Indian economy can grow at over
    8 per cent. Let us see how things turn out during the remaining term of NDA
    govt.