Expert Opinion

Published: Dec 29, 2021
Updated: Dec 29, 2021

India better placed for Fed tapering

At the beginning of the last fortnight starting November 15, the markets were buoyant, but they eventually relinquished all the gains. Since the US Fed announced it would begin tapering bonds at the end of the month, benchmark indices have been languishing. The BSE Sensex declined 1,050.68 points or 1.73% to settle at 59,636.01 in the week ended Thursday, November 18. The Nifty 50 index plunged 337.95 points or 1.86% to settle at 17,764.80. The BSE Mid-Cap index lost 450.16 or 1.7% to settle at 25,918.62. The Small-Cap index dropped 434.3 points or 1.48% to settle at 28,798.23.

Are the markets indecisive because they are anticipating a Taper Tantrum 2.0? Fortunately, India is not in a precarious position as in 2013 when the Fed started tapering to normalise quantitative easing after the 2008 financial crisis. India was listed in 2013 as one of the ‘Fragile Five’ economies and one of the most vulnerable to the consequences of tapering. However, it now seems better prepared to deal with these problems. Over $ 640 billion in foreign exchange reserves have been added to the country since 2013, more than twice the amount in 2013. A few other indicators indicative of financial vulnerability, such as external debt as a percentage of GDP, consumer inflation and current account deficit, have also improved since 2013. This shows that India is no longer ‘fragile’.

TRADE DEFICIT FALLS

In October 2021, India’s wholesale price index (WPI) stood at 12.54 %, compared to 1.31 % in October 2020. According to government data released on Friday, India’s retail inflation increased marginally to 4.48% in October from 4.35% in September. According to the Ministry of Statistics and Programme Implementation (MoSPI), India’s industrial production in September grew by 3.1% compared to 1% in the same month last year. The month of August saw an increase of 11.9% in IIP. By comparison, India’s merchandise exports in October 2021 were $35.65 billion, up 43.05% from October 2020. On a month-to-month basis, exports increased 5.5%. In dollar terms, imports increased by 62.51% in October 2021. However, on a sequential basis, imports declined 1.8%.

As exports increased and imports declined in October, India’s trade deficit narrowed slightly. A $19.73 billion trade deficit was recorded in October, compared to a $22.59 billion deficit in the previous month. September marked the highest monthly deficit on record.

CHINA UP, JAPAN DOWN

On the international front, retail sales in China rose 4.9% year-on-year in October, according to data released. Compared with a year ago, China’s industrial output also increased 3.5% for the month. According to government figures released on Monday, Japan’s economy shrank by 3% from July-September to the previous quarter, posting the first decline in two quarters as resurgent coronavirus infections hit consumer spending. Japan’s exports declined in October after seven months of double-digit growth due to slowing car shipments, as global supply constraints impacted the country’s major manufacturers. Data from the Ministry of Finance showed that exports rose 9.4% year-on-year in October. Following 13% growth in February, this month’s expansion was the weakest since a decline in February. Shipments of cars fell 36.7%. In the 12 months to October 2021, the Consumer Price Index rose by 4.2%, up from 3.1% in September. In addition, sales in the US rose 1.7% in October, indicating consumers were spending more. This compares with a 0.8% increase in September. Compared to a year ago, online sales increased by 10.2%. This was despite the fact that consumer prices rose 6.2% last year.

PROFIT-BOOKING DAMPER

Since there is little likelihood of a conspicuous fall in Indian equity markets due to the tapering, it would be more reasonable to attribute the lack of vitality to profit booking. Moreover, Indian equities are currently expensive, leading to investor wariness, which is one of the reasons why Indian equities have been one of the best performing emerging markets this year. Thus, the combination of better opportunities in the primary market and inflation worries seems to be the underlying cause of hesitation in the secondary space. Despite this, investors should keep a close eye on the market once the US Fed starts to taper since short-term corrections can arise as liquidity starts to dry up.

D-Street will evaluate international factors once the result season is over to decide its direction. As long as no positive triggers emerge, indices are expected to remain under pressure since the markets have adopted a ‘sell on rising’ mentality. Individual stocks will also move more than the market in the week ahead. Investors should continue to keep an eye on FII activity to gauge sentiment. They should also take a conservative approach rather than enter aggressive trades because global macros will dominate.

(Dr VVLN Sastry is a post doctorate in Economics and a PhD in Law & Public Policy. He is a passionate economist, financial analyst and law expert.)