Rising uncertainty | The Indian Express

For some time now, there has been a growing disconnect between the benchmark stock indices and the wider Indian economy.

Within minutes of opening on Friday, the Indian benchmark stock indices plunged by over 10 per cent, hitting the lower circuit that prompted a halt in trading for 45 minutes. The selling was across the board as fear and panic gripped investors. After re-opening, markets recovered their losses led, presumably, by bargain-hunting and short covering, but the volatility across Indian and global markets underscores the continuing uncertainty from the coronavirus fallout. The India VIX, which is essentially a measure of investors’ perceptions about risk, rose to 59.48 — its highest level since the global financial crisis. In fact, the last time markets hit the lower circuit was in that period.

For some time now, there has been a growing disconnect between the benchmark stock indices and the wider Indian economy. While stock indices have been inching upwards, earnings growth has been sluggish as economic activity has faltered. With this correction, the forward price-to-earning multiple is now below its long-term average. However, volatility is likely to continue, as uncertainty over the spread and depth of the coronavirus, and its economic fallout, will continue to weigh on markets. It is possible that the demand- and supply-side shocks emanating from disruptions in global supply chains owing to the lockdown in China, and the ensuing lockdown/quarantine in many parts of the world, continue to be felt well into the first quarter of the coming financial year. If the disruptions do not subside, the markets will have to factor in the possibility of forecasts for global growth being pared down even further.

The only silver lining for the Indian economy amid this gloom is the collapse in crude oil prices. The sharp fall in oil prices will reduce the country’s oil import bill and thus the current account deficit. It will lower inflation, and possibly boost government revenues and/or put more money in the hands of households. Lower inflation — the consumer price index has moderated to 6.58 per cent in February from 7.59 per cent in January — will increase the space for the monetary policy committee to cut rates further. But while, across the world, the policy response to the crisis has relied on either easing monetary policy, or fiscal stimuli, these measures are unlikely to offset supply-side disruptions and cut-backs in discretionary spending. The top-most priority has to be to contain the spread of the virus.

via Rising uncertainty | The Indian Express

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