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When it comes to trouble, Indian investors are dealing with more than their share now. The capital markets regulator is breathing down their necks and tightening screws across instruments to instil discipline. For once, this is the least of the market’s concerns.
The tensions brewing between Israel and Iran threaten to escalate into a full-blown war. The Middle East finds itself yet again in the throes of disruption and by extension, it would disrupt trade and supplies globally. The first commodity to show the impact is oil and oil prices have already been climbing. Crude has risen by about 7 percent since the Israel-Iran tensions began with the former’s claim to have assassinated a key Hezbollah leader. Since then, both nations have exchanged fire which now engulfs the Middle East. Understandably, predictions of oil at $100 per barrel have begun to do the rounds which would affect every importing country, including India. A war could cripple oil infrastructure and the worst outcome would be Tehran shutting down the Strait of Hormuz, which is the Achilles heel for world trade now.
The Strait of Hormuz is the key chokepoint responsible for nearly a fifth of global oil shipments and other commodities as well. An August S&P report had pointed out that shipping delays have become the norm of the day due to disruptions in the Red Sea and now the Middle East. Freight rates and insurance have only climbed higher and higher. The Middle East nightmare for trade has only begun.
But this may not grip the markets as much as it would the Reserve Bank of India. The central bank would be loath to ease its policy or even its language or stance in the wake of global volatility. The fact that the RBI has started easing somewhat by adding to liquidity as our Chart of the Day suggests, gives it more reason to keep status quo on rates. That means expecting a softer pitch from the monetary policy committee next week wouldn’t be wise. After all, crude oil prices dictate a quarter of our import bill and have a heavy influence on domestic fuel prices, inflation, and the exchange rate. Of course, India is better prepared than before to weather this and that is why the Middle East won’t weigh on the market much.
What investors must pay attention to is China. Xi Jinping’s stimulus bazooka has fired up stocks there and even gotten foreign investors to rethink on whether their ultra-bearishness towards China wasn’t warranted. China’s charm offensive on the markets comes after the country disappointed for almost three years with its regulatory crackdown on large technology groups and failure to revive a flailing real estate market. But the latest stimulus shot is aggressive, as reserve ratios of banks have been reduced and liquidity boosted along with a colossal bond issuance. Also, mortgage rates have been reduced to give a hand to the real estate revival. As Ananya Roy in her column states, the most important aspect is that Chinese policymakers have kept the door open to more stimulus.
What does this mean for India? “Considering that China’s stock markets are significantly undervalued compared to India’s lofty equities, foreign funds can be expected to find their way out of Indian equities and towards China’s stock markets,” Roy writes. The current downturn in Indian equities will test the resolve of retail investors and if that weakens, Indian equities can be entering a correction phase until the enthusiasm on China reduces.
However, this FT article free to read for Moneycontrol Pro subscribers, states that foreign funds are yet to warm up to Beijing over the stimulus. Perhaps investors are wisely waiting for the impact of these measures on the economy or even testing the prospect of more measures. But rock bottom valuations in comparison to India’s lofty ones make it irresistible for investors.
For Indian markets, there is one truth that has come home. China has always been the main guest in the foreign capital flows party and India is the plus one. It is easier to ditch the plus one if the main attraction gains favour. For now, it is not a happy place to be between a Middle Eastern nightmare and a Chinese wake-up call.
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Aparna Iyer
Moneycontrol Pro
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