Story behind market rout
Guest Column: Deepak Jasani, Head - Retail Research HDFC Securities

The Indian markets have been on a falling spree since the end of August which intensified towards the end of September. The following are some of the reasons for the fall in the Indian markets which continued in early October.

Oil at 4-year peak

India is the world’s third largest oil importer and meets almost 80 per cent of its fuel needs from overseas. Oil prices have been on the boil lately, touching four-year high levels. Along with the tumbling rupee, it could take a toll on India’s growth prospects and its shaky macros. The impending US sanctions on Iran would further squeeze the global crude supply and if the void is not fulfilled by other producers then market participants expect a further upsurge in crude prices.

Rupee depreciation

Over the past few months, the depreciating value of the domestic currency in relation to the US dollar has been a cause of concern, making it one of Asia’s-worst performing currencies. The higher import bill has also widened India’s current account deficit (CAD), with imports now being much bigger in value than its exports.

There is speculation that China may devalue the yuan to outdo the US; this is likely to have a ripple effect on other currencies, including the rupee. Fall in rupee value will affect the inflow of foreign investments.

Expectation of worsening deficit

India’s current account deficit is likely to be impacted this fiscal if global crude oil prices continue to rise and more foreign exchange is spent on procuring them. The government has taken several measures to stem the demand for dollars like raising import duties on non-essential items, liberalised foreign borrowing for oil companies to raise up to $10 billion, etc. The government has reduced its market borrowing by Rs 70,000 crore in the second half of the current fiscal.

However, the recent cut in excise duty on petroleum products would impact its revenue for the year. Continuous spiral in prices may negate the impact of excise duty reduction prompting the government to take further measures in an election year. Ratings agency Moody’s said the recent reduction in excise duty on fuel by the government will affect fiscal deficit and is credit negative for the country.

US-China trade tensions

The ongoing trade war between the US and China has witnessed both the countries slapping higher duties on goods imported from each other. The trade war tension has resulted in risk aversion towards companies in emerging markets. India is also among countries with low cost manufacturing base and could benefit from the US-China trade war. However, any duties imposed by the US on Indian exports could be detrimental to India’s growth.

Slowdown in global growth

The International Monetary Fund said the world economy is plateauing as the lender cut its growth forecast for the first time in more than two years, blaming escalating trade tensions and stresses in emerging markets.

The fund has projected a global expansion of 3.7 per cent this year and next, down from the 3.9 per cent projected three months ago. If the trade war continues, it could take a significant bite out of global growth, according to the fund.

Risk of earnings downgrade

The rupee’s longest rout since 2000 and oil’s surge to a four-year high have put earnings estimates of Indian companies at the risk of downgrades. The growing stress in Asia’s third-largest economy may soon translate into lower projections. Although export oriented industries like software producers and drugmakers will gain in local-currency terms, the net impact on the broader corporate sector may be negative because of higher import bills and impact on demand.

Liquidity crisis

IL&FS, a systemically important finance company, defaulted on its debt obligations which had a knock-on effect on non-banking finance companies (NBFCs) and housing finance companies (HFCs). NBFCs and HFCs in India are facing a severe liquidity crunch ahead of the festive season as both private sector and public sector banks have gone slow in extending loans to them, in the wake of IL&FS defaults. This was one of the key reasons for a Rs 2.3-lakh- crore net outflow from the mutual fund industry in the month of September.

Capital flight

The continuous fall in rupee, increasing crude oil prices, default by IL&FS, excise duty cuts have increased the risk premium for India. Increase in US interest rates has narrowed the arbitrage companies enjoyed by borrowing in US dollars and investing in India. All these factors have made foreign investors nervous about India’s weak macro with further risks to CAD and gross fiscal deficit, instigating them to pull out their investments from India.