Panic-Driven Selloff in Indian Stocks Not Justified

A Black Monday, indeed, for Indian stocks on August 24 as a wave of selling, driven by growing fears of a damaging slowdown in the Chinese economy, swept markets across the world.

An across-the-board selloff dragged the S&P BSE Sensex down 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 amid retreating wagers on a September liftoff.

The Sensex has dropped 8.4% in August, but is the largely sentiments-driven panic selloff justified? It is not; if India’s strong macroeconomic fundamentals, guaranteed by Reserve Bank of India Governor Raghuram Rajan, are any sign.

Bombay Stock Exchange
Indian stocks have gained (before Monday rout) 14% since May 2014.

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 on Monday. The central bank could also use its $380bn forex reserves cushion to limit volatility in the rupee, he said.

India’s sovereign bonds have returned 13% in the past year, Asia’s best performance, 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 lured in $622mn this quarter, the only inflows among eight Asian markets tracked by Bloomberg.

The rupee is better insulated from China-led swings in global forex markets. A top forecaster says the currency will outperform Asian peers as India is less exposed to China; Asia’s third largest economy even benefits from the slump in commodity prices. The rupee will earn 8.3%, including interest, by mid-2016, the best total return in the region, according to Bloomberg surveys.

Exports to China comprise less than 10% of India’s total overseas shipments, the lowest ratio among major regional economies, according to Morgan Stanley.

Raghuram Rajan
Raghuram Rajan: India in a “good position”.

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, 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-taped bureaucracy, push through tax and land reforms and upgrade infrastructure are encouraging signs for investors. Indian stocks have gained (before the Monday rout) 14% since Modi took office in May 2014.

Make no mistake, India’s nearly $2tn, 60% consumer driven economy (one of the world’s 10 largest) offers great prospects for investors. The economy is seen on track to reach the long-term target of taking its place as the world’s third largest, behind China and the US, with an improving investment climate.

In a wider sense, every investor, with a basic knowledge of market fundamentals, knows for sure that market-driven valuations as virtual reality; 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. A frantic attempt to reap a windfall from the roulette can leave the fingers severely burnt, sometimes beyond cure.

(The writer is a business editor based in the Arabian Gulf.)

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