10 things to keep you up when the Indian
market is down
Stock markets have slogged nearly 10% this year. Rupee has been one of the worst-performing
currencies worldwide, crashing 20%. Even the debt market is not left untouched. Bond yields
have spiked to record high, close to 10%.
Here are 10 things to know about the turmoil in the markets:
1) US Federal Reserve
An announcement by the US Federal Reserve in May kick-started the falling Indian markets. The
US central bank indicated it will stop its bond-buying programme with which it was infusing
liquidity worth $85billion into the US markets. This stimulus led to capital flows into riskier
emerging markets like India. Fearing a change in the programme, foreign investors have turned
risk-averse and exited from emerging markets.
Every day the Indian rupee is staring at new life-time lows. Despite several new measures
announced by the Reserve Bank of India to curbits fall, it is inching towards 70-to-a-dollar
levels. This negative sentiment has transferred to the equity markets too, dragging down key
3) FII outflows
A sharp depreciation in the rupee has led to erosion of wealth for foreign investors. This is
another reason why foreign institutional investors (FIIs) – who are one of the largest players in
the Indian markets – have turned net sellers. While they have primarily pulled out money from
the debt market, traders fear a selloff in equity markets too.
4) Rate hike
A depreciating currency pushes up the import bill and causes inflation. In fact, the effect is
already seen in the rise in July wholesale price inflation which rose to 5.9% from 5% levels. This
sparked off worries about an interest rate hike by the RBI, instead of a cut.
5) Growth concerns
India’s growth fell to 5% from 9% in 2010-11, the lowest in a decade. The RBI expects the
economy to grow at 5.5% in FY14, lower than its initial estimate of 6%. The more cynical
experts fear a sub-5% growth this fiscal. Adding to the concerns is the RBI move to squeeze
liquidity out by making it difficult for banks to borrow. This is because some private banks have
increased lending rates.
6) Bank stocks
Bank stocks, which rose earlier in the year, have witnessed a significant selloff over the past
three months. This is because of worries of a rise in non-performing assets (NPAs) due to a
slowing economy and RBI’s liquidity-tightening measures. A rise in bad loans makes it difficult
for banks to cut lending rates whether or not the RBI does so.
7) Current account deficit
Current account deficit is what the country owes the world. A higher deficit means a country is
spending more than earning. This puts pressure on its currency because it has to pay in dollars.
India is a net importer, majority of which is oil and gold. Its current account deficit has jumped
drastically in the last five years from 1.7% in2007-08 to 4.8% of the Gross Domestic Product
(GDP) in 2012-13. The government wants to cut this down to 3.7% of the GDP. To achieve
this,it has imposed higher duties on gold imports. India imports over 900 tonnes of gold each
8) Fiscal deficit
Fiscal deficit occurs when the government borrows more than it spends.India’s fiscal deficit had
shot up over 5% levels. The government has pledged that it will bring it down to 4.8% this fiscal.
To do so, it has cut expenditure. It has also steadily hiked fuel prices to bring down its subsidy
9) Food Security Bill
The government passed the Food Security Bill that promises 5 kg of rice, wheat and coarse
cereals for everyone in a month at nominal prices. This has fuelled concerns about the
government’s ability to meet its fiscal deficit target. The ambitious plan is expected to cost tax
payers Rs 1,25,000 crore.
10) IT stocks
Amidst all the gloom, investors found refuge in technology shares. The BSE IT index has
jumped nearly 10% this year on the back of better rearnings, improvement in the US economy
and the depreciation in the rupee. A weak rupee helps technology shares as they earn most of
their revenue in foreign exchange.