Sensex back to pre-Modi days: Is IMF right in calling India a bright spot?
When Narendra Modi took oath as the Prime Minister of India on 26 May, 2014, the Bombay Stock Exchange Sensex closed at 24,716.
The domestic as well as international investors' community had immense faith in the world's second most populous economy and this was reflected in the bull run of the Indian market that touched a new high of 30,000 in March 2015.
But since then, investors in India's share market have been incurring losses with the Sensex touching new lows every month. On 20 January this year, the BSE Sensex fell by 417 points and closed at 24,062.04. This means that whatever heights the Indian stock market had touched after the new government came to power have been lost and nobody knows where will it stop.
On 20 January BSE Sensex closed at 24,062.04, less than what it was when Modi took over as PM
A simple explanation for this is that stock markets worldwide have been witnessing a fall. This has especially been the case since July 2015, when the Chinese market started falling due to weak growth and fall in the global commodity prices.
The Chinese economy, which grew in double digits for two decades, is slowing down. On Tuesday, the International Monetary Fund cut the global growth estimates to 3.4% as against its April 2015 outlook of 3.6%.
But in the same report, the IMF has said that India remains a 'bright spot' amidst the slowing world economy. The IMF maintains that India is set to grow at 7.5% in the current financial year. This makes India the fastest growing economy in the world. The outlook on India remains stable since April 2015.
What explains the continuous fall in the Indian stocks market?
In September 2015, India's finance minister Arun Jaitley said that China's economic downturn is "a great opportunity" for the Indian economy, because "so the world needs other engines to carry the growth process. And in a slow down environment in the world, an economy which can grow at 8-9% like India certainly has viable shoulders to provide the support to the global economy."
But the investors' seem to be giving India a miss, even as they fly out of China and other world markets.
Theoretically, money in the stock markets moves from one market to the other. So if the Indian economy is indeed a bright spot amidst the global gloom, should it not be the first choice of investors?
Madan Sabnavis, chief economist at Care Ratings, explains the flight of money from the Indian markets on the lines of other falling economies of the world as 'rationalisation'.
"There was no reason why the BSE Sensex touched 30,000. It was completely a sentiment based flight and had nothing to do with the real economy. Though the IMF has a stable outlook on the Indian economy, not much is visible on ground since the new government has come to power. I believe there would not be anything positive in the Indian economy in the next two months".
Sabnavis' point is validated from the following numbers.
In December, India's merchandise exports contracted for the 13th month in a row. This was due to tepid global demand and a volatile global currency market. Also, the trade deficit widened due to a jump in import of non-essential items.
Data released by the commerce ministry showed that during the month, exports contracted 14.75% to $22.3 billion, while imports shrank 3.9% to $33.9 billion, amounting to a trade deficit of $11.6 billion.
The decline in Indian exports during the global recession of 2008 was only for nine months on the trot.
In December, Indian exports contracted 14.75% to $22.3 billion. Trade deficit stood at $11.6 billion
For over a year, the government has been arguing that the fall in exports is a global phenomenon. However, Indian industry is unhappy with the government. Frustrated with the constant fall in Indian exports, TS Bhasin, chairman of Engineering Export Promotion Council of India, recently told Mint "If we find ourselves in the same trough, how does India become a bright spot? Exports are a crucial component of the GDP and overall job-creation and the onus is now on finance minister Arun Jaitley to be liberal with export incentives without waiting for the budget. February end will be too late".
Domestic sectors like real estate, Fast-moving Consumer Goods and cement have either registered a fall or marginal growth in the first two quarters of the current financial year.
Clearly, in this scenario even IMF's praise is not enough for investors to believe in the India story.
India is benefitting from the fall in global crude oil prices due to which its Current Account deficit is pegged to come down to 1.1% of the GDP. in 2015-16, compared to 1.3% in the previous year. Yet, this has not curtailed the fall of the Indian rupee which is at a 29 month low of Rs 68 to a US dollar.
"We live in an interconnected world. There is no country that will stand out while its neighbours go down. The Chinese economy is in serious trouble and it is unlikely that India will avoid the contagion. The IMF outlook on India is irrelevant in this context. If the Chinese economy faces deceleration due to fall in the commodity prices, Indian markets too will face pressure," said Saurabh Mukherjea, CEO-Institutional Equities at Ambit Capital.
Where is the money going?
A general logic of stock markets is that money that leaves a slowing economy moves towards an economy with a brighter outlook. Given the bright spot that Indian economy is currently, is, the flight of the money should be towards India. But since, the investors are giving a thumbs down to India, the question that needs to be asked is: where is the money headed?
According to Alex Mathews, head of research at Geojit BNP Paribas, "Currently the US bond market is the safest spot for world investors. The US federal reserve has said that it will increase its interest rates 3-4 times in 2016. This makes US bonds a better investment option".
Currently the US bond market is the safest spot for world investors
In December 2015, the US federal reserve increased the interest rate for banks by 0.25%, a first in 7 years.
This has made the US government's bonds a much more attractive avenue for investors to park their money.
On 15 January, the yield on the 10-year treasury note - a type of US government bond - fell below 2% for the first time in three months. It closed at 2.035%, its lowest level since 27 October.
A decline in the yield or interest rate on the 10 year treasury note shows the increased demand for the US government's bond at a time investors find other global assets risky.
The fall in the share market clearly suggests that India is not immune to the global crisis. And the government needs to do much more to fight the economic gloom.
While there is no doubt that India's growth outlook is better than rest of the world, it also needs to understand that outlooks can also change.