Dr Ashwani Mahajan
Consistently falling share prices in the past few weeks have been worrying the financial circles in India. It is notable that Sensitive Index of Bombay Stock Exchange (SENSEX), which had crossed 30,000 mark on March 4, 2015, dipped to 26599 by May 7, 2015. Indian rupee which had gone stronger at rupees 61.8 per US dollar in January 2015, depreciated to rupees 64.25 per US dollar by May 7, 2015. Though there has been a slight improvement in the markets later, however rupee is still revolving around rupees 64 per US dollar. Depreciation of rupee has been naturally worrying policy makers, as any depreciation in rupee would cause inflation. As imports are reaching nearly 29 percent of GDP (2013-14), even 3 percent depreciation of rupee may result in one percent hike in inflation.
Strengthening economy
Though declining share markets and weakening rupee raises momentary concerns; if history is any guide, share markets have never been barometers of any economy. Asia Pacific Regional Outlook Report released by International Monetary Fund (IMF) on May 7, 2015 amply proves this fact. Report says that Indian economy is at a bright spot and in coming years it would be world’s fastest large economy surpassing China. Report praises Modi government’s steps towards economic reforms. On the other hand international rating agencies have also mended their attitude towards India. Moody’s has changed India’s outlook from ‘stable’ to ‘positive’ and hopes to improve India’s ranking in the next 12-18 months. Almost similarly Standard and Poor’s has also initiated the process of changing India’s rating’
Indian economy has started showing signs of strength after a spell of downtrend for 2-3 years. It is notable that the economy has started overcoming after the slowdown in the years 2011-12 and 2012-13 in GDP growth. It is heartening that Indian economy is expected to grow at more than 8 percent in 2014-15; after growing at 7.4 percent in 2013-14, consumer inflation has cooled down to 5 percent now, with much lower wholesale price inflation, deficit in balance of payment on current account has also come down to only 1.6 percent in 2013-14, from 4.8 percent in 2012-13. Economic Survey released immediately before presentation of Union Budget 2015-16, states that economy is at a rare ‘sweet spot’. Today India is all set to be the fastest growing large economy of the world, defeating China. Foreign investments are also booming, and world’s attitude about India has also undergone a sea change. All that makes Finance Minister to say- ‘its India’s turn to fly’.
Immediate reasons for downtrend in Markets
There is a general feeling that downtrend in share markets and weakening of rupee is being caused by agricultural crisis due to untimely rains, threatening slackening of demand, declining corporate profits, imposition of minimum alternate tax on foreign institutional investors(FIIs) and hurdles in the way of economic reforms undertaken by Modi government. In April 2015, FIIs made a net selling of rupees 1100 crores and in May by May 7, they had made a net selling of rupees 6500 crores. Due to withdrawal of funds from share markets by FIIs, and transferring the same abroad is causing rupee to depreciate. Yet there is another school of thought, who says that FIIs are actually selling Indian stocks, not because they do not have faith in Indian share markets; they are selling stocks for collecting dollars to meet their speculative obligations abroad due to sudden rise in price of crude oil.
But future is Bright
It is notable that in 2013; almost all indicators were showing worsening economic scenario. Economic situation in the country was so bad that whereas GDP growth had dipped to 4.8 percent, consumer inflation had gore up to 12-13 percent and foreign trade deficit had climbed to nearly 11 percent of GDP and current account deficit (CAD) is balance of payment to 4.8 percent of GDP. Indian rupee had dipped to nearly rupee 69 per dollar and had become the fastest depreciating currency amongst major currencies and therefore already bad inflationary spiral got further worsened.
However, situation today is much different. India’s growth has already surpassed that of China. Consumer inflation has cooled down to nearly 5 percent; and nation is not facing any big external payment crisis. Recently a report of World Bank stated that India is much behind in terms of ‘ease of doing business’; and present government is working towards reforms in that direction.
Whatever may be the direction of share market, rest of the world has optimistic outlook for India. Recent report of IMF has praised steps of the present government, including Jan Dhan Yojna, progress in the implementation of Goods and Service Tax (GST), foreign investment policy etc. World’s outlook towards India, has improved significantly. Total stock of foreign direct investment has increased from US$ 290 billion in 2013 to US$ 344 billion now. However, IMF report says that due to rising debts of corporate India, share markets are cautions and slowing downward trend.
For recent downtrend in stock markets, there could be global reasons also. However, this is not at all due to any weakening of Indian economy. When FIIs sell their stocks and transfer money abroad, obviously rupee slides down. In such a situation, Reserve Bank of India (RBI) can intervene in the short run and enhance supply of dollars in the market to stem any fall in rupee. Present fall of rupee being a purely short term phenomenon, there is hardly any risk in making intervention in currency market by RBI.
(The author is Associate
Professor, PGDAV College,
University of Delhi)
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