Rupee drowns, crude blows, stocks bleed
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.