The curious case of the Indian stock market

Despite negative global cues, Indian markets remain resilient

Markets, they say, have a mind of their own. While at times, the reaction to a development is sharp enough to create a panic, in some cases they completely choose to ignore the gravity of a situation – even when it is happening on home turf.

Take for example the recent set of figures on account deficits released by the government – the current account deficit (CAD) and the details on the country’s fiscal deficit position. While the situation is quite alarming and the markets should have shown no sympathy to the numbers, surprisingly they chose to be ignorant.

Much to government’s relief, there has been a 77% drop in gold imports in value terms and 28% in volume terms during the quarter ended September 2013 on the back of several initiatives taken by the Reserve Bank of India (RBI). On the other hand, the fiscal situation is nothing to cheer about. The first five months alone have seen the government reach 74.6% of the fiscal deficit target for the entire year’s Budget Estimate (BE).

To top it all, closer home, India Inc will start reporting its performance for the September quarter in a few days from now; and if the advance tax numbers are anything to go by, there will be nothing much to cheer about on this front either. All this comes in the backdrop of the upcoming RBI’s Monetary Policy review later this month. The central bank recently hiked rates in an attempt to reign-in inflation amid slowing growth.

So why are the markets ignoring these key economic data points and upcoming events, or is the worst already factored in?

Firstly, the markets seem to be eyeing global developments for now, especially in the US and how the country deals with the government shutdown and its impact on the US Federal Reserve’s taper of the $85-billion-a-month bond buying programme, which saw huge liquidity flow into the emerging markets (EMs), especially India which has fuelled the market rally.

After the US government’s partial shutdown, the Congress must raise the debt limit in coming weeks or risk a US default that could roil global markets. While the opinion was divided on the standoff and the extent of potential damage to the economy, most analysts suggest that the impasse would keep the government closed for about a week, at most.

Given the fragile state of the US economy and several indications from the US Fed on the “quality of economic growth” has fuelled speculation that either the taper could be delayed or the quantum reduced significantly from the earlier envisaged $20 billion.

Secondly, economic recovery across the euro-zone is also fragile. Though experts suggest that countries like France and Germany are on a stable footing, the euro-zone is not yet completely out of the woods and it will take another four – five years before there is stable growth.

Thirdly, two of the country’s immediate worries – a sliding rupee (against the US dollar) and soaring crude oil prices on account of geopolitical developments in the Middle East have been laid to rest, at least for now.

Lastly, one must realise that India still is a force to reckon with in the EM pack despite weakening growth and alarming fiscal situation. Within the EM pack, Philippines and Malaysia are growing relatively fast and will continue growing at a scorching pace going ahead, analysts say. China too, will grow at a healthy pace, albeit not at the earlier pace of 10%.

In the Indian context, however, analysts argue that post the General Election scheduled for the next year and after the structural policies are announced and implemented, there is no reason why the Indian economy cannot get back on to the growth path. Thus, India cannot be completely ignored as an investment destination. The fund flow to EMs will continue with India cornering a fair share of this. And till the good times last, the possibility of a shutdown in the Indian context, approaching IMF for a bailout or a sovereign rating downgrade seems a far-fetched thought.

While hope is still breathing in oxygen to keep the market sentiment alive for now and have been resilient, whenever they do decide to react to the fiscal situation at home and how the key economic developments take shape, be prepared for a rollercoaster ride. And yes, till that time they are giving Finance Minister P Chidambaram ample time to figure out a solution to the fiscal problem and perhaps soothe their nerves, if needed, with a quotable quote from his favourite poet, Thiruvalluvar.