Markets

Current account deficit, geopolitical tension add to market nervousness

K. S. BADRI NARAYANAN | Updated on March 12, 2018

The undertone is likely to remain weak for Indian stocks as current account deficit (CAD) widened to a record high 6.7 per cent of GDP in the October-December quarter. CAD, which is the difference between inflow and outflow of foreign exchange, was 5.4 per cent in Q2 (July- September). This suggest that India is increasingly depending on the rest of the world for domestic consumption

Besides worsening CAD, Cyprus banking crisis and geopolitical tension due to North Korea’s war rhetoric added to the nervousness of market participants.

Cyprus last week imposed a levy on all bank depositors to fund €10-billion bailout package.

Analysts fear that though the Cyprus crisis was mostly over, the European Union may replicate the bailout strategy for future rescue deals, particularly in teetering economies such as Portugal, Spain, Greece and Italy. There are widespread apprehensions among global and domestic investing communities that if Cypriot-style bailout is used as a template for other rescues, then the global equity markets will slide sharply as flight of capital will move towards safe-haven instruments such as gold and US dollar. Meanwhile, North Korea has vowed to strengthen its nuclear weapons, a day after announcing it is in a “state of war” with South Korea and warned Seoul and Washington that any provocation would swiftly escalate into an all-out nuclear conflict. Tensions have risen sharply since North Korea detonated a nuclear device in February, defying global sanctions. The US said that it takes North Korea's latest saber-rattling threats seriously while cautioning that Pyongyang has a long history of bellicose rhetoric.

Back home, political uncertainty will keep nagging marketmen after the DMK – one of the key allies of the UPA Government – withdrew its support early this month.

According to JP Morgan, marketmen turn nervous now as they fear the Government’s ability to execute the reform agenda. “Our cautious stance on Indian equities since late January has been premised on expectations that the slowdown in the economy is sharper than street estimates and the window of opportunity for reforms could likely narrow given the substantial election calendar over the next 12-14 months.”

Another clue will be the announcement from the India Meteorological Department about the 2013 southwest monsoon.

> badrinarayanan.ks@thehindu.co.in

Published on March 31, 2013

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