A VIEW FROM THE MARKET. ‘Global meltdown could be a blessing in disguise for India’

Financial markets across the world have been rattled over the last two weeks following the currency readjustments made by China on August 11. China readjusted the value of the yuan against the US dollar by 3.7 per cent to 6.40/$ from 6.20/$.

The expectation of a slower Chinese growth and rising real rates in the US led to a collapse in commodity prices. This translated into a double whammy for emerging markets which find themselves in the middle of a perfect storm.

On the one hand, in case of emerging economies which have been largely commodity exporters (Brazil, Russia, Saudi Arabia, and Malaysia, among others), government revenues have declined by 30-50 per cent due to the fall in commodity prices. These economies will have to make significant fiscal adjustments to realign their budgets to this deflationary reality.

While India’s financial market has been buffeted by volatility as a consequence of the contagion, the global turmoil might actually hold several significant bright spots for the country. And I believe this turmoil can be a blessing in disguise for India, if we can get our act together.  India’s external accounts are healthy, short-term foreign debt is at a reasonable level, and forex reserves adequate to tide over any short-term volatility in financial markets. 

India is a major importer of commodities, including oil. The collapse of oil prices itself can save the country $50 billion annually, which is about 2.4 per cent of GDP. This is unprecedented. This will lead to a significant improvement in India’s external balances and fiscal situation, providing the much-needed boost to domestic consumption. Inflation has been undershooting the RBI target and with further correction in commodity prices, this should open a window for meaningful rate cuts over the next 12 months. 

With a huge domestic economy, India is certainly isolated from the rest of the emerging market economies and can comfortably tide over the global deflationary spiral by enhancing investments, reviving consumption and accelerating growth.

 Equity investing is about the future because the present economic situation is already well priced in by the markets. Successful investors have the uncanny ability to look through a crisis and use the ensuing volatility to their advantage.

If one were to look through this recent turmoil in financial markets, one can see significant gains coming India’s way over the medium term. Investors should use this volatility to their advantage rather than succumbing to it.

The writer is Head — Equity, Axis Mutual Fund. The views are personal.

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