India’s sell-off threatens to get ugly
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
In March, India’s benchmark Sensex index was promising to rise above 20,000 points. In May, the Nifty index breached its own high-water mark of 6,200 points. How the mighty have fallen.
By lunchtime in Mumbai on Friday, the Sensex was at a meager 18,765 while the Nifty hovered around 5,675. But how much further will Indian markets fall?
Indian assets joined a mammoth emerging markets sell-off following news that the US Federal Reserve would soon begin to “taper” its programme of quantitative easing, sucking up liquidity.
Of the money that has come into India’s bond market this year, 85 per cent has now exited, Samiran Chakraborty, regional head of research at Standard Chartered, told beyondbrics.
“The loss we have seen has been on the bond side,” he said. “If similar outflows occur on the equities side then the impact on the rupee could be even worse. The difference between the depreciation this time around is that it has occurred as local factors in India were actually improving, so if the global sell-off moderates there is no reason for the rupee to depreciate in a big way. But we don’t know if this will go into equities or stop.”
The rupee has set a series of new record lows in the past week – the latest being 59.97 to the dollar on Thursday.
A Prasanna, an economist at ICICI securities, says the route could accelerate. “A lot of leveraged money has probably come in and just been shaken out. There has been carry trade carried out and that is now unwinding.”
It’s hard to gauge the extent of this borrowing but it is likely to be enough to put added pressure of investors’ finances as assets lose value, requiring additional collateral.
Another issue is corporate India’s unhedged currency risk – the cost of repaying forex loans has soared in the past week. On the simplest level, that will hit bottom-line growth. Economists at Morgan Stanley estimate foreign exchange liabilities are at around $200bn; a 5 per cent move in exchange rates increases that liability by $10bn.
Related reading:
Fasten seat belts for turbulent QE exit, FT
Pace of selling slows after Wall Street sell-off, FT
EM sell-off: here we go again? beyondbrics
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