Fear hangs over Dalal Street as the long awaited flight of capital has begun. That the Indian economy’s woes were masked by a unidirectional market appears to have ended for the moment. In just two months, foreign portfolio investors have pulled out over $2.7 billion from Indian markets, the bullish sentiment has turned negative and is now bordering on restlessness.
Both domestic and foreign investors have pulled out money in the last seven trading sessions which has resulted in investors’ wealth worth a staggering Rs 4.5 lakh crore evaporating. Several factors have played in taming the market that’s currently valued at Rs 134.5 lakh crore. None more so than the acceptance finally by the BJP government that the economy’s wheels are grinding to a halt, impacted deeply by DeMo and the vagaries of GST.
Traditional analysts have attributed the FPIs encashing their investments and booking profits to over-valuation and heating up. There’s no reason to believe that the market is over-valued was in a dire need of a correction.
Our view is that the very talk of a stimulus package has put off the investors — both domestic and foreign players — in equal measure. Of course, fundamentals are weak, but global sentiment remains benign and there is enough room for businesses and investors to make more money. Agreed that an earnings cycle downgrade is equally worrying, but yet the undertone in the market was positive. The panic by the BJP-led NDA government where it has fallen prey to the idea of stimulus has come as a body blow.
Even if one were to cite 5.7 per cent GDP growth as one defining reason for investors to lose confidence, this is not a buy-able argument of any relevance. Since there are signs of economy bottoming out after demonetisation and GST roll out, upward movement was widely expected from here on. Most analysts and advisories have only pointed to upswing in the economy including industrial growth by the third quarter. Also, the festival rush for goods and services consumption would only add to the momentum. Unfortunately the macro picture across the economic vector is of bad news. The 2.78 per cent projected fall in kharif grains output at 134.67 million tonnes added to the woes. Here again, given that its just the first cut of food grains output estimates, there’s scope for revision like every year. Even if the cut in output in rice, coarse cereals, oil seeds, pulses and cotton were to happen, is there a risk of food crisis? What is considerably more worrying is the pricing erosion which is adding to farm distress. The food glut has left its imprint in the agrarian economy and it refuses to go away in a hurry.
Two valid factors for strained sentiment in Indian markets were the global tensions in the Korean peninsula. Secondly, lack of confidence within the manufacturing sector and companies on being able to do business in the changed environment post-GST and low on cash in transactions. For long businesses have had it too easy with sweet heart deals and political patronage. Shift to rule-based system may take a while for these businesses. In the interregnum, the sentiment would definitely be volatile while foreign investors may prefer the transition to systems overhaul. While FPIs would like to cash-in to restrict risks owing to adverse sentiment, this may be the right opportunity for the foreign investors to bring in FDI. The question then begs an answer, have we improved ease of doing business enough to attract more FDI?
While tensions in the Korean peninsula are not the handiwork of the Indian government, apprehensions within the domestic business establishment to revive the investment cycle will have to change immediately. FPIs are also taking money off the table, one cannot have a secular uptrend in equity and they will be back once they see the right buying opportunities. They are after all in the business of making money for their clients.
If one were to go by the Asian Development Bank prescription, Reserve Bank of India will have to take the lead and cut interest rates to perk up the sentiment in the market, businesses and consumers. Government ministers and officials will have to stop making even meek noises on economic stimulus, etc. Corrective measures in a dynamic economy like ours is an ongoing process that need not be branded as stimulus, which essentially puts off the foreign investors and FPIs. Since government has very limited fiscal space, Indian businesses must take charge to walk the talk and push ahead with investments. The credit offtake though is at its weakest. There’s nothing called an absolute moment for making investment decisions. Relative risk benefit analysis guided by fundamentals must lead to positivism.