Ru­pee drowns, crude blows, stocks bleed

Money Times - - -

The three eco­nomic macros are for the first time in­flict­ing dam­age to­gether and the dam­age has just be­gin to hap­pen. Crude, cur­rency and bond yields are play­ing havoc and the im­pact of this shows on the eq­uity mar­kets. Al­though the Sen­sex and Nifty do not show the in­ten­sity of the dam­age but be­yond a few se­lect scrips, the bleed­ing is on. A near panic is de­vel­op­ing on many coun­ters as ev­ery knowl­edge­able per­son is aware of the del­i­cate fis­cal bal­ance and how the cur­rent ac­count bal­ance is poised.

Global tur­moil was ini­ti­ated by Trump’s ‘pro­tect USA’ pol­icy to safe­guard the US econ­omy. The hard­en­ing of the US Dol­lar es­pe­cially against all emerg­ing mar­ket’s cur­ren­cies, OPEC’s safe­guard pol­icy of keep­ing crude oil prices high, is a dou­ble edged sword, which is bleed­ing In­dian econ­omy. In­fla­tion due to the ris­ing crude, ris­ing dol­lar, ex­pen­sive im­ports, may com­pel RBI to in­crease the in­ter­est rate any time now. The mar­ket has taken into ac­count all this and en­tered into a hes­i­tancy mode in the wake of gen­eral elec­tions in the next six months. The mar­ket is fully aware of the gov­ern­ment’s re­luc­tance and in­abil­ity to take any cor­rec­tive mea­sure at this junc­ture.

The Ru­pee’s fall to an all time low of nearly Rs.73 per dol­lar amidst global trade has wor­ried the In­dian gov­ern­ment. The price of petrol touch­ing al­most Rs.90 and diesel around Rs.80 per litre puts great stress on the In­dian con­sumers and will spark high in­fla­tion. So why is the gov­ern­ment not act­ing? Well, any tam­per­ing with petrol and diesel prices may be a great loss to the coun­try’s ex­che­quer at a time when in­fra­struc­ture spend­ing is so vi­tal and fis­cal deficit is so del­i­cately poised.

It is be­lieved that the gov­ern­ment’s in­ac­tion will help and re­solve the cri­sis to nat­u­rally in time. El­e­vated fuel prices may de­press the oil de­mand and usher a course cor­rec­tion. The de­pre­ci­ated Ru­pee may cut the de­mand for im­ported goods and bring the cur­rent ac­count deficit in con­trol. By do­ing noth­ing to re­duce rev­enues, the gov­ern­ment is able to keep fis­cal deficit in con­trol. Last but not the least, eq­uity mar­kets shall wit­ness er­ratic cor­rec­tions and may even de­velop near panic but sta­bi­lize soon there­after. Cau­tion needs to be ex­er­cised be­cause any wors­en­ing in fis­cal deficit and cur­rent ac­count deficit may ag­gra­vate in­fla­tion and cur­rency de­pre­ci­a­tion jeop­ar­diz­ing the prospects of a com­fort­able win by the NDA.

High time both the rul­ing and op­po­si­tion benches stop the blame game and face the real cri­sis. It is clear that the cri­sis is not of In­dia’s mak­ing but more of a global prob­lem. Even the op­po­si­tion, which may point fin­gers at the BJP does not have a so­lu­tion for this on hand. Hence let’s ed­u­cate the masses on the rea­sons for this cri­sis and pre­pare them to face this sit­u­a­tion squarely.

For now, eq­uity mar­kets will remain volatile with a neg­a­tive bias. Flight of for­eign cap­i­tal from In­dia and other emerg­ing mar­kets shall leave the cur­ren­cies weak. With bond yields at a five year high, we might wit­ness a shift in as­set al­lo­ca­tion from eq­uity to debt. Time to keep your fin­gers crossed and watch the sit­u­a­tion closely.

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