The meltdown

The carnage on Dalal Street on Thursday has come after a series of smaller nicks that has left the stock market bleeding from the beginning of this year. In a way, the period is reminiscent of 2008, when Indian stocks were helplessly caught in a global selling wave. The Sensex’s fall of 3.4 per cent was mirrored by a similar cut in the Hang Seng; most Asian and European indices were down between 2 to 3 per cent. The global markets have been marked by intense risk aversion over the last couple of months. This is reflected in the appreciation of over 7 per cent in the value of the yen against the dollar and in the 15 per cent appreciation in gold, the traditional safe haven.

Amongst the many global factors that contributed to the recent bout of selling is the continuous slide in crude oil prices, which has made investors nervous given what it implies — namely, that global demand and growth are still anaemic. Discouraging economic data emerging out of China coupled with the incessant fall in commodities has raised fears of a systemic failure in large European banks such as Deutsche Bank AG, that have substantial exposure to these segments. The central banks in Europe, the US, Japan and elsewhere seem to have run out of ideas on how to prevent the slide. The dismal earnings announced by Indian companies have not done much to salvage sentiment in the domestic market. The net profit of companies that have declared their earnings so far is down 6 per cent over the corresponding quarter in 2014. Banks have been hard-hit as they have had to make additional provisions for stressed assets to comply with the RBI’s recent rules. Commodity producers have suffered due to falling realisations and manufacturing companies have been struggling with slowing demand. The sluggish global environment is roiling the earning of companies with global reach.

But there is some hope in these depressing times for Indian investors. Companies are likely to register better earnings in the coming quarters due to a positive base effect, and benefit from lower interest rates, falling input prices and a consumption boost from the Seventh Pay Commission payouts. India is also much better placed in comparison with other countries given that its superior growth rate is largely driven by domestic consumption. This is probably why most foreign investors are overweight on India even as they are cautious about other emerging markets. Even so, the dismal earnings and the large provisions for bad loans made by Indian banks in the December quarter are a cause for concern. The Centre and the RBI need to draw up a comprehensive strategy to clean up the books of the banks without impacting their ability to lend. For, it is difficult to envisage a sustainable recovery if the banking sector continues to be hobbled by losses and laden with toxic assets.

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