Indian stocks plunged on Monday as a wave of selling, driven by growing fears of a damaging slowdown in the Chinese economy, swept markets across the world. Amid a panic-driven sell-off, the S&P BSE Sensex nosedived 5.9% to close at 25,741.56, the most since January 2009. The rupee fell over 66 for a dollar for the first time in two years.
Global equities have lost more than $5tn since China’s shock currency devaluation on August 11 amid growing fears that the slowdown in the world’s second-largest economy may be deeper than estimated. The rout is also eroding confidence that the global economy can withstand higher US interest rates.
The benchmark Sensex index has dropped 8.4% in August despite India’s strong macroeconomic fundamentals, guaranteed by Reserve Bank of India Governor Raghuram Rajan.
India is in a “good position” compared with other emerging markets because of strengthening economic growth, softening inflation, low short-term currency liabilities and a narrowing fiscal deficit, Rajan said. The central bank could also use its $380bn forex reserves to limit volatility in the rupee, he assured.
India’s sovereign bonds have returned 13% in the past year, the best performance in the region, according to Bloomberg. Global funds have sold a net $260mn of India stocks this month, compared with withdrawals of $2.03bn from South Korea, $1.23bn from Taiwan and $597bn from Indonesia. Local equities have attracted $622mn this quarter, the only inflows among eight Asian markets tracked by Bloomberg.
The rupee is better placed to withstand the China-led swings in global forex markets. A top forecaster says the currency will outperform Asian peers as India is less exposed to China and even benefits from plunging commodity prices. Exports to China comprise less than 10% of India’s total overseas shipments, the lowest ratio among major regional economies, according to Morgan Stanley.
India will probably do best among the 10 largest emerging equity markets after the US Federal Reserve boosts rates for the first time in nine years, and Brazil the worst, according to a Bloomberg survey (taken before the yuan devaluation) of 10 stock fund managers in the US, Europe and Asia. A large portion of India’s current-account gap is funded by remittances from abroad rather than investment flows, while the US, not China, is its biggest export market.
Indian Prime Minister Narendra Modi’s reform agenda to crack down on corruption and red-tapped bureaucracy, push through tax and land reforms and upgrade infrastructure is encouraging investors. Local stocks have gained (before the Monday rout) 14% since Modi took office in May 2014.
In a wider sense, every investor with a basic knowledge of market fundamentals knows for sure that market-driven valuations are virtual assets; and losses, or gains, are primarily notional. But the age-old rule for investing remains the same: Base your decisions on the market’s underlying fundamentals to ensure decent returns over longer term. Any frantic attempt make a quick buck can leave the fingers severely burnt, sometimes beyond cure.