It is that time of the year when you want to celebrate. Stock markets had an early Diwali last week. Benchmark indices like the S&P BSE Sensex and NSE Nifty 50 rose over five per cent in the week. The rally was fuelled by some strong buying by foreign portfolio investors.
Prospects of financial markets getting cheap money are driving gains. The US just got a new president who may spend more to provide relief to the country’s people through an economic stimulus. Trillions of dollars are ready to get pushed across markets. When markets are flooded with money at near-zero interest rates, there is a ‘risk-off’ approach towards assets like equities.
Despite gold prices staying near record highs, equity prices in the US and emerging markets in India continue to rise. However, there is a need to exercise caution.
After every sharp surge, this column would recommend reading through the fine print.
There are signs of recovery. Car sales have grown, the government’s monthly collection of goods and services tax is back to over Rs 1 lakh crore, and there is excitement in businesses opening to regular working hours.
Many analysts expect a ‘V-shaped’ economic recovery to play out. Some also suggest that India’s growth forecast of a near-10 per cent contraction could see a change. There are positive noises made by businesses, too, in quarterly result commentaries.
A survey by McKinsey and Company, a global consulting firm, found that consumers around the world are shifting their buying to value and essentials.
In India, consumers are showing a sign of moving to buy things beyond grocery ahead of the festive season. However, there are no signs of a recovery that could justify a runaway rally in the stock market.
Risks aheadIn the stock market, domestic mutual funds and institutions remain net sellers. That means mutual funds are facing a redemption pressure.
Those who had diligently started systematic investment plans have either stopped them or have begun to take that money out for meeting monthly expenditure.
The government already admitted last month that people withdrew employee provident fund money for expenses. If there is any financial distress among households, it would have an impact on their spending.
A fundamental issue is investments in the economy. For anyone to bet on future growth, businesses and individuals need to borrow more and spend. Presently, the government is the only spender in the economy. That is possible because the government owns the Reserve Bank of India (RBI). It can borrow money from the market quickly and use it for expenditure. Credit growth remains slow.
The banking sector is a cause of concern. The non-banking financial companies (NBFCs) have had a rough 2020. RBI deputy governor M Rajeshwar Rao had warned about the risks associated with NBFCs in a speech last week. He pointed that as at end-March 2020, NBFCs have been the largest net borrowers of funds from the financial system.
He also said that more than half of that borrowing is from banks. Another report by Ernst & Young, a global consulting firm prepared for FICCI, an industry body, pointed out that the pandemic has disrupted the already existing stress in the system.
That has happened due to a significant drop in new customer acquisition and a sharp fall in repayments and collections. There was also a so-called liquidity crunch or shortage of money as regular banks refused to lend more to NBFCs. There is a suggestion that large NBFCs be converted into banks.
For a nation to grow at a faster rate, it needs several healthy banks. Only the State Bank of India with assets worth $568 billion features among the top 100 global banks in the world. There are at least 16 Chinese banks in the S&P Global list.
The problems in the banking sector have resulted in the underperformance of most public sector banks and NBFCs.
That Nifty Bank index reflects the disappointment. It has performed poorly in comparison to other sectoral indices since March 2020. The lack of confidence in the banking sector could stall any potential economic growth.
$568 bn Assets of SBI, the only bank that features in 100 global banks’ list
(The author is editor-in-chief at www.moneyminute.in)