Until September 2013, Murphy’s Law seemed to be at work — all that could probably go wrong with the Indian economy and its stock market did. But then the tide turned, thanks to some spirited comebacks, ‘green shoots’ and fortuitous turn of events.

The market barometer, Sensex, duly reflected the change in fortunes. Volatile through the year, the index touched its low point (17,906) for the year in late August, but then came back charging to scale a life-time high. To be sure, even now, all is not well with the economy. But the pervasive pessimism of June-August has given way to hopes that the worst may be over, and that things may look up in 2014.

Shaky start, false hopes A weak start in 2013 set the tone for what was to follow in the next eight months. Economic growth had slipped below 5 per cent in the December 2012 quarter and the current account deficit (CAD) had shot up to 6.7 per cent of GDP. Corporate India’s weakening sales and profit growth in the December 2012 quarter reflected these stresses.

The RBI’s repo rate cuts of 25 basis points in January and March 2013 to spur growth did not help much. Meanwhile, retail inflation raged on in double digits. A nervous Sensex ceded ground and by mid-April, it was down 6 per cent since the beginning of the year. The BSE Mid-cap and BSE Small-cap indices took sharper cuts, down nearly 15 per cent and 20 per cent, respectively.

The March quarter data raised some hopes, though. Economic growth recovered a bit and current account deficit (CAD) fell to 3.6 per cent of GDP. Also, retail inflation in April and May moderated somewhat to below 10 per cent. The RBI too did its bit by cutting the repo rate by a further 25 basis points.

These positives led to a rally in the Sensex in May and helped it recoup lost ground. But it proved transient. Also, the market recovery was not broad-based — gains in the BSE Mid-cap and Small-cap indices were tepid and they were still far off from levels at the beginning of the year.

It did not help that the performance of corporate India (BSE 500 companies excluding public sector oil companies) continued to slip. The March quarter sales growth slowed to single digits and profits declined nearly 10 per cent compared with the year-ago period.

The rout Big trouble was brewing on the currency front. The seemingly insatiable appetite for gold in India, further stoked by a fall in international prices of the precious metal, resulted in a significant rise in the country’s imports. This, combined with anaemic export growth, worsened the trade imbalance, and put pressure on the rupee. But worse was to come.

In late May, the US Fed Chairman Ben Bernanke hinted that the ‘taper’ of the quantitative easing (QE) programme could start soon. Mayhem followed. Foreign investors started pulling money out of emerging markets, including India.

This triggered a fall in the value of the rupee, which until then had been trading in the range of 53-55 to the US dollar. By mid-July, the rupee had touched 60 to the dollar. An alarmed RBI tried to stem the decline by curbing excess liquidity. It raised the rate of the marginal standing facility (MSF) — used for short-term borrowings by banks — by a steep 200 basis points.

But this triggered panic in the bond market, emboldened speculators and exacerbated the rupee’s fall. Foreign institutional investors (FIIs), worried about erosion in their investments due to a falling rupee, continued their exit. Between June and August, they withdrew close to $3.7 billion from Indian equities and $8.9 billion from Indian debt.

On the other hand, a deteriorating trade balance resulted in the CAD for the June quarter worsening to 4.9 per cent of GDP. Faced with this pincer, the rupee was routed. It touched a nadir of 68.8 to the dollar by August end.

That was not all. GDP growth in the June quarter faltered and slowed to a three-year low of 4.4 per cent. Inflation hovered at close to 10 per cent. And corporate India continued its poor show with the June quarter sales growth decelerating to around 6 per cent and profits falling 6.5 per cent year-on-year.

Caught in this perfect storm, the Sensex slipped again and by end-August was down nearly 8 per cent from the beginning of the year. The mid-cap and small-cap indices were far worse off, down nearly 30 per cent since January.

The recovery But come September; the economy and the market got the spring back in their steps. The claw-back was facilitated by many factors, some anticipated and some unexpected. Among these was the concerted effort by the government and the RBI to tackle the worsening external trade situation by reining in gold imports. The customs duty on the metal was steadily raised from 2 per cent at the beginning of the year to 10 per cent by August. In June, the RBI under Governor D. Subbarao scrapped the gold-on-lease model used by jewellers, making it mandatory to pay upfront for imports. Then came the 80:20 rule under which gold importers had to export at least 20 per cent of their imports. All these actions drastically reduced gold imports in the following months. This, along with a pick-up in exports, thanks to a weak rupee, resulted in a sharp fall in the CAD to 1.2 per cent of GDP in the September quarter.

The RBI’s move in the fag-end of August to open a special dollar window for the oil marketing companies — big guzzlers of the greenback — stemmed the rupee’s fall and helped it stabilise.

The change of guard at the central bank in early September also helped to reverse market sentiment. The new RBI governor Raghuram Rajan moved swiftly and inspired confidence with a series of steps to attract foreign exchange flows and support the rupee.

These included offering attractive swap arrangements to help banks attract foreign currency deposits, and facilitating higher overseas borrowings for banks.

The markets responded enthusiastically. Within a fortnight, the rupee strengthened to around 63 to the dollar, and the Sensex gained more than 10 per cent from the August low to reach close to the 20,000 mark. The mid-cap and small-cap indices also gained 6-7 per cent.

Then came another unexpected positive surprise — the re-think on the dreaded ‘taper’ by the US Fed in September. This accelerated the return of foreign institutional investors whose net inflows in the Indian equities market in the September-November period amounted to nearly $6 billion.

This more than offset their net outflows of $4 billion from the debt market in the same period. The cost of borrowings for banks reduced as the RBI steadily moderated the MSF (short-term interest rate), even as it raised repo rates twice by 25 basis points to tackle the stubborn inflation.

It helped that the GDP growth in the September quarter improved to 4.8 per cent. Also, the deceleration in the sales growth of corporate India was reversed in the September quarter with a 14 per cent rise compared with the same period a year ago.

The profit decline of around 6 per cent, though, continued to disappoint. But the rate of decline has moderated and there is expectation that lower commodity prices, lower interest costs and a stronger rupee should help corporate India grow profits in the coming quarters.

>anand.k@thehindu.co.in

Also read: >2014: Temper hope with caution

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