Updated: January 22, 2016 12:40:51 am
The BSE Sensex has plunged below its May 16, 2014, level when the Narendra Modi-led alliance secured a stunning victory in the Lok Sabha elections. That, combined with the rupee falling below Rs 68 to the dollar for the first time since August 2013, has led many — not all Modi detractors — to formally proclaim the end of achhe din. This is a highly simplistic view. The over $2.7 billion worth of net sales in Indian stocks by foreign portfolio investors (FPI) since November owes more to global factors, especially a deepening Chinese slowdown and collapse in commodity prices. These have led to a pullout of funds from all emerging markets, including India, made worse by the US Federal Reserve embarking on a “normalisation” of its monetary policy that would mean higher interest rates. That a significant part of FPI flows originates from sovereign wealth funds of oil and other commodity exporting nations — whose own finances are now under pressure — hasn’t helped.
The role of “global” factors is also borne out by the rupee, which, in real effective terms against a basket of six major currencies after adjusting for inflation differentials vis-à-vis the countries concerned, has actually appreciated by 4.1 per cent since December 2014. The weakening against the dollar is, thus, more a result of the latter’s strengthening in an uncertain global environment, where the greenback has become every investor’s safe-haven asset. This general atmosphere of pessimism is also currently being reflected in Davos, the idyllic Swiss ski resort, where the dominant conversation among world business leaders — even amid formal sessions on topics from gender and wealth disparities to the impact of 3D printing and advanced robotics technologies on jobs — is on how much lower oil can go and how bad things can get in China.
The best way for India to deal with such unfavourable global headwinds is to focus on improving the domestic investment environment and preserving macroeconomic stability. On the latter front, there is no doubt that the country is today much better placed than in August 2013, when the combination of runaway inflation and twin deficits made it most vulnerable to speculative capital outflows. While India is feeling the jitters from the bloodletting in global markets, there is no reason not to expect investors to view it more favourably than other emerging economies once the present, hopefully temporary, period of volatility subsides. The coming Union budget offers an opportunity for the Modi government to demonstrate its intent beyond incremental reforms. RBI Governor Raghuram Rajan is spot on in noting that if policymakers concentrate on “fundamentals” and “do all the good things” now, “people [will] reward you”. His advice is worth heeding.
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