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Thursday, October 28, 2021

Monday mayhem: Taking stock of the China threat

Sensex fell 1,624 points, or 5.94 %, on Monday, the most in over 6 years, raising fresh apprehensions about India’s ability to tide over uncertainties triggered by a slowing China.

Written by Sandeep Singh |
Updated: August 25, 2015 4:17:49 am
Sensex fall, China exports, China economic growth, india economy, Sensex fall China, Sensex India, Explained At a private stock market gallery in Kuala Lumpur on Monday. The biggest crash in Shanghai since 2007 echoed across the world. (Source: AP photo)

Why are global markets under pressure?

Trade data released earlier this month showed China’s exports fell 8.3 per cent in July. China has been the world’s manufacturer for years now, and its growth has been dependent upon exports. A decline in exports suggests a global softening in demand and fall in consumption.

There is also concern that a shrinkage of China’s manufacturing will impact other countries that are part of the value chain of Chinese manufacturing. A dip in China’s growth and global demand has led to the softening of commodity prices, and that, in turn, has impacted other commodity exporting nations such as Russia and Brazil.

While China announced a depreciation of its currency, the yuan, twice last week in order to prop up exports and keep its factories going, the move rang alarm bells across the world, leading to a slide in many global currencies, and a fall in their stock markets.

There were renewed concerns over Greece where, not too long after a debt default and signing of a new deal to stay in the eurozone, Prime Minister Alexis Tsipras resigned last week, and his party split. And finally, there are apprehensions of an expected rate hike by the US Federal Reserve in September, which may lead to greater funds outflows from emerging economies.

Why did the Sensex fall 1,624 points?

The Shanghai Composite in China and Hang Seng in Hong Kong have fallen 19 per cent and 11.4 per cent since August 14. The Dow Jones Industrial in the US fell 3.1 per cent on Monday, taking its loss to 8.4 per cent. All the major European indices in the UK, Germany and France have fallen more than 10 per cent since August 14.

In comparison, Indian markets lost only 2.5 per cent last week, and were holding on even as markets worldwide crashed. On Monday, however, the Indian markets too gave in to pressures of the global sell-off, tanking as a sharp outflow of foreign institutional money took place.

Experts say that since several commodity driven emerging economies including China are under extreme pressure, FIIs are finding it tough to liquidate their money there — and are, therefore, looking to sell in the Indian markets in order to meet their obligations abroad. “You will sell what you can sell,” said the CIO of a leading mutual fund.

A sharp fall in the markets also pushed short-sellers to take fresh positions, pushing the market further into the red.

Are things likely to get worse?

As global funds are looking to find a safe haven amidst the ongoing uncertainty, most of the money is headed into US treasury bills. While RBI Governor Raghuram Rajan on Monday attempted to reassure the markets that India’s economy was in a better position than others, market insiders said that the outflow of funds was likely to continue for some time, given the uncertainty in global equity markets, and the ability of currencies to hold. There are also questions over the ability of central banks across the world to address investor concerns, and to keep their currencies stable.

Market observers also pointed to pressures on account of global linkages. With several Indian companies across sectors exposed to vulnerable economies such as Russia, Brazil, China and Venezuela, there will be pain, both to the companies, and to banks that have exposure to them.

All this is likely to lead to more funds outflows from emerging economies, and keep the equity markets under pressure.

Is the depreciation of rupee a concern?

Currencies across the world have been under stress over the last couple of weeks after China decided to devalue the yuan. The rupee has depreciated around 2.8 per cent over the last 10 days. By comparison, several other currencies have fallen in excess of 5 per cent in the same period. The RBI Governor’s statement on Monday that the central bank would not “hesitate” to use India’s forex reserves — now over $ 380 billion — to reduce the volatility in the currency, soothed some frayed nerves, and demonstrated that the RBI was not too worried over the recent depreciation of the rupee against the dollar.

There is also a view that a fall in the rupee has been more than covered by the fall in crude oil and other commodity prices — since India is a big commodity importer. While exporters are set to benefit from a fall in the rupee, commodity importers will not get impacted much because commodity prices themselves have softened. A depreciation in the rupee in line with the devaluation of the yuan will also help Indian exporters stay competitive, and help attract foreign direct investment into the country.

Can India benefit from this situation?

Subdued inflation and a lower interest rate trajectory are two of the biggest benefits that the Indian economy can take advantage of in the coming days. The RBI has cut the repo rate by 75 basis points this calendar year, and with inflation within its comfort zone, there is a likelihood of more cuts. Not only will that improve the ability of companies to borrow and invest, it will also lead to a rise in consumption going forward.

While there is uncertainty all around, the fact that commodity prices have softened comes as a boon for Indian companies. In fact, results for the quarter ended June 2015 show that while revenue growth was in the negative zone, aggregate profit for BSE 500 companies rose on account of a decline in raw material expenditure over the corresponding quarter last year.

The government has also started clearing stalled projects, especially in road and infrastructure development, and said it will push public investment. These steps are likely to lift sentiment and trigger private sector investments.

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