What's driving down India's stock markets

India’s stock markets have been in the doldrums. While India’s macroeconomic fundamentals are by and large stronger in comparison to any other emerging economy of the world, the FIIs chose to sell off their equities, which is a matter of concern.

Hyderabad: India’s stock markets have been in doldrums for the past few weeks. In July 2019, the Sensex slipped 4.86 per cent and Nifty too fell down 5.69 per cent, which is the sharpest decline recorded since October 2018.

This has caused an erosion of Rs 13.7 lakh crore from the Indian capital markets since the Union Budget was presented on July 5.

In fact, this is the worst single-month performance of the stock markets in the last 17 years.

Although the domestic institutional investors bought equities worth Rs. 17,915.14 crore in July 2019, it was the Foreign Institutional Investors (FIIs), who have been net sellers in the same period.

They sold shares worth nearly USD 1,623.13 million and this triggered the erosion in the stock markets.

What is more worrisome is that, a fall of this magnitude happened when the factors like India’s exchange rate and global crude oil prices are relatively favourable.

It is in this context, there is an urgent need to introspect the reasons for this down trend in the markets and resort to corrective measures.

What went wrong?

While India’s macroeconomic fundamentals are by and large stronger in comparison to the any other emerging economy of the world, the FIIs chose to sell off their equities, which is a matter of concern.

This phenomenon is to be seen from the perspective of market expectations. It appears that there have been large scale market expectations from the new incumbent government, that there would be more business friendly policies in the near term, given the land slide mandate it got.

However, the proposal in the Union Budget 2019-20 to increase the surcharge on super rich tax payers would have disappointed the markets.

On the other hand, it also appears that the expectations of the markets, regarding business friendly policies have over shot the reality and the current fall in the markets only suggests that they are correcting themselves and trying to adjust to the new normal.

It is a fact that any Government works in a particular frame work, under certain political compulsions and it has the imperative to serve a wide variety of stake holders and markets are one of them.

It is not to argue that the Government has no role to play in this context. It is only to argue that market expectations at times, discounts the reality, with a time lag and the present scenario of India’s equity markets performance is in one among such cases.

Hence any prudent investment demands a thorough analysis of fundamentals and an understanding of the ground realities.

The ground realities:

The realities at the ground are bleak. The exogenous factors such as weak global demand and the escalating trade war between U.S and China in the wake of Trump’s fresh announcement on 2nd August 2019, to impose 10 percent tariff on rest of the $300 billion worth Chinese imports from next month had only added to further uncertainty in the global financial markets.

On the other hand the endogenous factors such as the slowing domestic economic growth, to its lowest rate in the last five years, downward revision of India’s growth prospects for 2019-20 by the World Bank, weakening credit supply are taking a toll on the business sentiments and triggering a capital outflow.

What could be done?

At policy level, the factors like Trump’s decision to impose tariffs on China are largely not in the purview of India.

However, the situation in the stock markets could be improved by resorting to confidence boosting measures that could provide respite to the markets.

First and foremost, it is pertinent to arrest the capital out flow or at least decelerate their speed of outflow.

There is a need to revive the investor sentiment by announcing policy measures that could boost prospects of consumption led growth and also improve public expenditure.

This could be achieved by steps to improve household incomes and fiscal sops such as lesser taxes.

These stimulus measures could improve the disposable income of the households and revive consumption demand, thereby boosting investor confidence.

On the other hand, in the long run it is pertinent to reverse the trend of capital outflow and attract larger investments.

This needs major policy reforms, aimed at addressing the structural challenges India faces on the front of labour productivity, governance, market functioning, addressing the issues related to business environment.

This is high time the policy makers realize the need the urgency of these measures. What India Inc. needs at this point of time is less politics and more economics.

(Written by Dr Mahendra Babu Kuruva, Assistant Professor at H.N.B. Garhwal Central University, Uttarakhand)