With a terror attack targeting a defence installation over the course of 3 days and a dip of over 500 points in the Sensex within 4 days of the New Year; the new year started on a slightly sour note for India. While analysts are quick to pin it on the volatile Chinese economy, it doesn’t fail to raise some cautionary signals.
Some reasons for the Monday fall:
- Chinese stocks fell 7% on weak cues from their struggling economy and less than confident factory activity. Shareholders with more than 5% in companies were banned from offloading their stock. This fuels concerns of a selling rush when the ban ends on Friday, 8th January, 2016. The fall has already wiped out trillions of Yuans worth of market capitalisations
- China cut the value of Yuan against the US Dollar on Monday in a bid to boost its export market. A surprise devaluation in August last year brought the Yuan down by almost 5%, sending tremors in the international markets on the concerns of the economic slowdown in the country.
- Markets felt the effects globally. Asian markets saw the effects with Japan’s Nikkei tumbling 3% & Hong Kong’s Hang Seng loosing 2.7%. In Europe, Germany slumped 4% and USA saw a fall of about 2.5%
- India, with a weaker Rupee against the US Dollar (66.61 to the dollar vs 66.14 as seen at close of market on Friday), was hit hard.
- Manufacturing sector in India also saw gloomy clouds, contracting for the first time in 2 years. This has also been exacerbated by the recent floods in the South of the country and softening domestic demand.
- Analysts also attribute the sharp fall in the Sensex to profit taking measures by the Indian shareholders, seeing the recent benchmarks set by both Sensex and Nifty being at 2-month high.
These, however, do not talk about the developing scenarios which may play a pivotal role in the time to come. Global markets are facing a threat from various sides, some of them being–
- Saudi Arabia (and allies) severing ties with Iran: With theological differences being the bone of contention, Saudi and Iran, countries with some of the largest oil deposits in the world, are steadily headed towards a standoff. The House of Saud, belonging to the Sunni sect, may be looking to strengthen their claim as the leaders of the Muslim world, being threatened by a mainly Shiite Iran. The slowly growing relations between Iran and USA also makes this a point of concern for the long time US ally. With some of the largest oil fields in the balance, the world will watch the Middle Eastern tussle with interest.
- Europe: with a saturated market and not much in growth opportunities, Europe is yet to take into account the economic impact of the influx of over a million refugees from conflict zones of Syria and nearby areas.
- USA: Having over-extended campaigns in Afghanistan and Iraq over the last decade and a half, USA may get embroiled in the ISIS campaign. With costs expected to rise with other key Middle East allies slowly pulling back to address other security threats, USA may have to review their economic and military commitments. With the use of shale gas reducing their dependency on imported crude, they have managed to secure a key area of energy futures to help offset the overall financial drain.
- China: a beneficial partnership with Venezuela assures it of energy futures, with the growing economic outlook given the latters oil reserves and the formers production base and market size.
- India: High dependence on oil imports put a limiting factor to India’s growth, having to import nearly 80% of the country’s crude oil demand. A contracting manufacturing sector and slow growth in market opportunities give it a gloomy outlook. At the same time, focus on domestic markets and a revamp in many policies (retail and professional services having seen some of this and logistics sector being the next focus) allow for some hope.
Overall, it is a very precarious road to secure India’s Economic stability. The revamp at the policy level is an indicator of a better bureaucratic system. Make in India intiative, coupled with Digital India, gives access to hitherto untapped markets which may make the difference. But for long term security, steps have to be taken to secure the energy futures and to address the domestic demand.
Ranveer Raj Bhatnagar