Contagion, a 2011 Hollywood medical thriller, had a plot about a virus that originates at an obscure location and ends up affecting millions worldwide. The medical parlance continues to influence financial markets too.
The recent turmoil in Turkey and the slowdown in China caused a considerable damage to markets way beyond the borders of those countries. The phenomenon of a contagion, where one country’s problems spread to others, is not new. In 1996-97, the collapse of the Thai Baht caused the Asian Financial Crisis. In 2007-08, problems with housing loans in America brought the world economy down.
The impact of any financial crisis is far and wide and lasts long enough for pundits to write books. The shock reaction of investors to events is understandable. Not everyone can fathom events that happen beyond the borders of their nations. We have always emphasised on connecting the dots through this column. If one can work on that process, the shock value can be reduced.
How is Indian market faring
India’s stock markets were often vulnerable to problems in the US or other countries. Billions of dollars have been invested over the years in Indian equity and debt markets. Share prices have always moved in tandem with money invested or pulled out by foreign investors. However, things have changed over the past few years.
Local investors are increasingly investing in equity markets through systematic investment plans of mutual funds. Besides this, the government has eased restrictions on provident funds and pension funds to invest in the stock market. While they always bought debt securities, they are now permitted to invest a portion of incremental flows into equity markets. As a result, Indian share prices have remained near record-high. This is despite strong outflows in the first three months of the current financial year from foreign investors.
The Indian currency markets witnessed the rupee tumbling to an all-time low. Experts like former RBI governor Raghuram Rajan and government officials have brushed aside concerns. Currencies of countries like Turkey, Indonesia, South Africa and Mexico have been hit the hardest. The reason for that is they have a high current account deficit and high external borrowing as a percentage of their GDP. A current account deficit is a money a country owes the world in foreign exchange. External borrowings are the foreign currency loans. A combination of that gives jitters to local currencies.While India’s current account deficit is at a four-year high in the June quarter, India’s external borrowing is not so significant as a percentage of the GDP.
What can you expect
Most analysts do not expect any significant fall in the rupee from the current level. Most of them do not expect oil prices to rise significantly from here too. The outflow of foreign investor flows from Indian equity and debt market has reversed in July and August. This means more foreigners are buying Indian assets. While exports are expected to remain sluggish and imports vulnerable due to uncertainty in markets, foreigners continue to invest in India.
Inflation remains the biggest risk. If the minutes of the monetary policy committee (MPC) of the Reserve Bank of India released last week are anything to go by, a majority of the learned people there expect inflation to hover around 5 per cent up to 2019-20. This means interest rates are expected to stay high.Interest rates on existing floating rate loans would inch up. New loans are not going to be cheap.
Your personal finances will be driven by the stability of your future income and invest in the right assets. Your fixed return investments like bank fixed deposits would continue to maintain their rates of interest or marginally hike it.
If you are investing in equity, you may want to seek help from an advisor to understand thematic funds. A couple of consumer sector-focused funds have been launched recently. This indicates an assessment by mutual funds that India’s consumption is a good story to play in times of global volatility. Companies that sell goods and services to Indians earn their income in rupees and not vulnerable to foreign exchange volatility as businesses that depend on imports or exports.
Landslide effect
Interest rates on existing floating rate loans would inch up. New loans are not going to be cheap. Fixed
return investments like bank fixed deposits would continue to maintain their rates of interest or marginally hike it.