Monkey see, monkey do is an old adage. The Indian stock market seems to have learnt the lesson well. Hence, the 2.2 per cent fall in the stock market bellwether and the deeper declines in mid- and small-cap stocks in response to recent global events are not surprising. Though these events are hardly cataclysmic for the Indian economy or its companies, Indian markets are like that only, reacting in a knee-jerk fashion to global market moves. Partly, this is because of the overwhelming reliance on FIIs for direction. This trend has, in fact, gained pace over the past two years, as FIIs have been the sole drivers of market action, even as both retail investors and domestic institutions have been missing in action. Partly, too, it is because of smart players moving in for a quick kill. Once the initial wave of mayhem and profit-taking by FIIs is over, and investors take time to think it over, they may find that slower growth in the developed world, if it sustains, isn't such a bad thing for the Indian economy or its companies after all.
For one, slower global growth may be just what is needed to take the fizz off commodity prices, particularly crude oil, which have spiralled upward in the last year. Any sharp meltdown in oil and other commodities will bring about an automatic solution to part of India's inflation problem, thus taking the pressure off the Reserve Bank of India to keep raising interest rates. Two, though softer commodity prices may trim profit projections for the few commodity companies in the Sensex, it will signal better profitability for the multitudes of other companies which use commodities and energy as inputs. In the overall scheme of things, these companies make up a larger share of the market than the commodity processors. And, three, if growth in the developed markets looks questionable once again, India, even with a ‘low' 7 per cent growth may begin to look more appealing to foreign investors deciding on their relative allocations across markets. Better prospects for developed markets in 2010 was, in fact, what led to FIIs pulling out funds from emerging markets such as India, to make a beeline to markets closer home.
From a purely macroeconomics viewpoint, what has happened in the market over the last two days is inexplicable. The increase in the US debt ceiling ought to have calmed the bourses. But, perhaps, China saying that it would not buy any more US debt spooked the market because, without Chinese credit, the US economy cannot grow. At the same time, though, US companies are sitting on handsome piles of cash which they will not invest until banks in the country start lending again. And they are going to take some time to get back into business.