Markets crash: The risks that loom over India's feel good economic index
Howsoever, one may ridicule the markets for its "snobby" status among the economic indicators, there is no denying the fact that financial markets are bellwether of the feel good factor in the economy. Thus, the consecutive fall in stock prices after Budget 2018 doesn't augur well for the narrative-nervy government.
Global factors do have their share in the post-Budget slump, but bigger concerns are the domestic factors that can keep the markets frail for longer than expected.
Narratives apart, a feeble or volatile stock market is poised for several macro- and micro-economic complications amid economic slowdown and looming inflation.
The Budget has by and large disappointed the street with imposition of long-term capital gains and bigger than expected fiscal slippage. The RBI's monetary policy review will be the next most important event.
As the shadow of inflation looms over the economy, the central bank is expected to remain hawkish and continue with the interest rate pause. The market would definitely get spooked if the RBI goes for an interest rate rise or substantial correction in growth projections for FY19.
With a widespread post-Budget tumble, now, the stock market is clearly divided between cautious and optimist flocks. In the light of looming economic indicators of high inflation, rising oil prices, twin (current account and fiscal) deficits, possible rise in interest rates and lack of consumption demand, a group of players look forward to a volatile and generally subdued trend in short- to medium-term, while quite a few players believe a deep correction is overdue and the market will soon bottom out for fresh buying.
What the future holds if the market continues with a bearish or volatile undertone for longer than expected:
The party has just begun
The exponential rise in the stock market after 2014 has substantially altered the financial investment scene in India. While real estate and gold turned unattractive, markets became a darling of middle class savings, especially from small towns. The domestic fund inflows to the markets are being channelised by the soaring Indian mutual fund (MF) industry. The mutual fund industry's assets base (investment) jumped to over Rs 22 lakh crore in 2017, as they received a total inflow of Rs 1.69 lakh crore in 2017 alone, as per the industry estimates. Households accounted for 48 per cent of all mutual fund assets as their investments in equity schemes jumped by 50 per cent during the same period.
Fund managers fear that a prolonged frail market may bring down the inflows in the mutual fund industry by 50 per cent. The markets, traditionally led by foreign institutions, are being complemented by domestic investment in a befitting fashion. As mutual funds provided an essential cushion to the markets to weather the unexpected turbulence, withdrawal of domestic investors may turn the market riskier to global vagaries.
Weak returns and high taxation can also force investors to return towards opaque physical assets like gold and real estate. Incidentally, gold started gaining traction as global equities has hit a speed bump.
The primary risk
Owing to sustained bull run, the initial public offerings (IPOs) touched a decadal high in 2017. A total Rs 67,141 crore has been collected by 36 companies from various sectors during 2017. This is the second highest IPO collection in the past 10 years. Going by industry estimates, at least 48 companies are all set to knock the markets during the next quarter with IPOs and secondary market offerings of over Rs 445 crore collectively.
The ongoing market slump could spoil the IPO party.
The upcoming PSU bazaar
The government may have killed the golden goose of market by imposition of tax on long-term capital gains, however, the finance ministry just cannot afford a long bear run for the sake of fiscal restoration. The Centre has exceeded the disinvestment target (72,500 crore - highest ever) of 2017-2018 and is expected to receive about Rs 1 lakh crore. The government has set a disinvestment target of Rs 80,000 crore for the financial year 2018-19, higher by over 10 per cent year-on-year from the current year’s target.
The government compulsorily needs a sustained bull run to get closer to the ambitious PSU sale target.
The foreign fear
Indian markets are led by foreign investors. They pushed markets to the skies just before the ongoing slump. The biggest risk for 2018 for the equity market in India and globe is in fact the return of the global growth. The growth revival will make central banks to withdraw monetary easing at a more accelerated pace. This will result in higher interest rates and the bond yields across the world.
Monday's (February 5) mayhem in global markets was driven by the rising bond yields in the US market. The money market in India also witnessed rise in 10-year benchmark bond yield on Monday ahead of the RBI's monetary policy and fall in equities.
Foreign institutional investors (FIIs) are very sensitive to the cost of capital. They will be forced to cut their exposure in India as rising bond yields may increase their cost of capital.
Political pangs
And last but not the least, India is approaching a packed electoral cycle. After the results of Gujarat Assembly elections and the recent by-polls in Rajasthan and West Bengal, market players are getting cautious about the political weather. In fact, the forthcoming state elections could be the most-watched event in the market.
Markets are likely to take its direction after the RBI's monetary policy. As far as small investors are concerned, in short- to medium-term, a bumpy road lies ahead. However, for long-term, it is a smooth ride if you are driving a wisdom-packed SIP vehicle.