The meltdown is attributed to fears of inflation hitting the US economy.
It used to be said that when Moscow sneezed, the Communists in India got a cold. Monday’s biggest one-day meltdown in American history, with the Dow plunging 1,175 points, saw global stock markets, including India’s, go into a free fall that continued on Tuesday. In an interlinked world no one is spared, and it’s only a question of intensity. The meltdown is attributed to fears of inflation hitting the US economy. Perhaps US President Donald Trump spoke too soon when he crowed about the stock market gaining $8 trillion in value since he took over — the Dow gained 45 per cent as on January 26, 2018, a year into his presidency, with new highs being hit consistently. But what goes up must come down, and the higher it goes the harder it falls, as the Dow showed. Inflation in the US means higher wages and more consumer spending, that ultimately leads to inflation and the possibility of the US Fed raising interest rates. It also means US companies’ profits are squeezed if they have to pay higher wages. For Indian markets, it’s bad news —for when the US hikes rates, foreign investors sell their stocks in emerging markets and head back to the US. That’s what has happened as foreign portfolio investors pulled out of India. The Fed may raise rates at least three times this year, some reports claim.
The good news of this meltdown for India is that markets are now more attractive as stock prices that were rising continuously have fallen substantially. This correction was long overdue as markets were going up for nearly 15 months without a pause. Those who missed investing in the bull market have a chance to invest now.
It’s a quirk of timing that this meltdown happened when Indian markets were singed by the long-term capital gains (LTCG) tax on traded shares imposed in the recent Budget. The finance minister was quick to defend his Budget, noting Tuesday’s fall was due to global cues. The markets had already digested the adverse impact of the LTCG tax after falling on the day it was announced.
With the Reserve Bank poised to announce its monetary policy on Wednesday, there is speculation that it may hold interest rates and not follow global cues. It had so far held rates as the Monetary Policy Committee preferred to wait and see how the monsoon and other policy issues like demonetisation and GST panned out. Major economies like Japan’s that are poised for growth are sending signals that herald a rate hike. Britain and the European Central Bank may also be in favour of hiking rates.
India’s economy is on track to be the fastest growing among emerging markets, with all economic indicators showing buoyancy. It seems unlikely that the RBI will do anything to trip the economy.