MARKET CRASHES - MORE OF A KNEE-JERK REACTION

By Research Desk
about 5 years ago

 

By Ruma Dubey

After the galloping last week, today, the first day of a new week, the markets have crashed badly. Looks like floors itself have come down! Going down over 630 points! It took everyone by shock; the sheer intensity of the fall baffled all.

But this fall today is not India centric; it was dictated more by global occurrences. And that too some good economic news from USA on the job front. On Friday, which was Saturday for us folks in India, news came in that employers added 295,000 jobs last month, which was far above expectations of about 235,000. So this means the economy is slowly bouncing back and that’s good news, right? Well, that’s not how market looks at things. What it has instead looked into is the repercussion this fall in unemployment will have on the Fed Reserve and its ‘economic data’ which is its basis for hiking rates.  Thus this fall in unemployment has fuelled expectations that unemployment will fall further and this will stoke up inflation. With rate hike tied in to unemployment and inflation data, it is expected that this could prompt the Fed to hike rates, which in turn could make equities in emerging markets unattractive and we could see FIIs withdrawing money.

This withdrawal of money by FIIs is the usual, “wolf wolf” cry for every time the market falls like this. It makes one wonder – our markets are so dependent today on FIIs to move the markets that the mere thought drives down the indices; why such a fragile support system?

Anyway, that point apart, the moot question is – will the FIIs scoot once rates in USA are hiked?  The markets are talking about a rate hike by June or July, indications for which will be given in the 18th March Fed meet. If that is the case, currently fund managers, who had not expected such a good improvement in the numbers, are not really positioned for moves made by the Fed on rates. Thus when this shift comes, the rush to exit will most certainly come.

Wait! This is in general context not India centric. Specifically, when it comes to India, we are currently in a unique position. Foreign funds would have taken positions after Modi’s win and now after the Budget, their belief in India’s story has only become stronger. Thus with economic growth expected to jump up with impetus coming from the Govt and RBI initiating the downward rate cycle, surely, based on pure common sense it could be illogical to make a rushed exit now. Most FIIs will wait out this rate hike, remaining well entrenched in India. It is not like a rate hike was not expected; right from December, after the QE ended, talks had begun of a rate hike and it was inevitable in current year. Maybe it will come in earlier than expected.

For FIIs to exit in India, they will most likely wait till end of the year, to validate their belief in the new Govt and wait for the rating agencies to give their verdict. This will be based on the fiscal deficit and GDP growth. For now, India seems to be poised well. Inflation will raise its ugly head once again but market might look beyond.

Thus FIIs are not rushing out of India in a hurry. They know it’s a growth story they are chasing here. So irrespective of the rate hike there, which could be 25 bps to begin with, it is unlikely that they will give up the good gains on equity here.

Today was a knee-jerk reaction to the Asian markets sell-off and profit booking too. But India’s long term story remains intact, at least as of now. We really need not worry at the moment. And yes, the US improving is very good news; maybe the markets will see this and celebrate with a recovery.

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