#dnaEdit: Storm signals

The Tuesday ‘massacre’ at the Bombay Stock Exchange (BSE) which saw a fall of 855 points, was caused by foreign institutional investors (FIIs) selling off on further slide in international crude prices. The stock mayhem was also driven by concerns over the outcome of Greece elections, and the possibility of the country quitting the Eurozone if the Leftist bloc — the Syriza — were to win the Friday polls. However, Indian market watchers and analysts appear to be unflappable. They have expressed the belief that the Tuesday market tumble does not mark the end of the bull run seen since September last year. They feel that domestic institutional investors would step into the breach that the exiting FIIs have created. Wednesday did witness a dramatic rebound. The fall has slowed down but the negative trend continued.

Stock exchange storms signal difficult times, which should serve as a warning system. The impending storm may not materialise, but it helps to take note of the changes taking place globally. In an attempt to keep out the bad news, economists and finance ministers tend not to look at the stock exchange in times of stress. But this approach does not really help. 

India will have to gear up to face the changes in the world of international finance. In recent months, lower oil prices have helped the country to rein in the soaring inflation rates of the last few years. Continued low oil prices combined with dampening demand in Western and Asian markets could lead to general recession. This is not good news for Indian exports or the services sector. Such a trend would also have implications for the overall growth trend at home. In such a scenario, India should not expect brisk investment inflows in the short term. 

Oil production levels are unlikely to be reduced by the Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia, though American production levels might peak soon before flattening out. Price stabilisation in the oil markets will take a while. Though driven by the stressful economic forces in the European Union (EU), the outcome of the Greek elections goes beyond economic calculations. What India can hope to do with regard to oil markets is take advantage of the low prices while preparing for the price rebound. India will have to temper its export projections to the EU as well as investment flows from that end.

It would not be advisable for India to ignore the storm signals, and assess the Tuesday market volatility merely as an aberration. The signals require India to take a long-term view of the world’s oil markets and chart a long term strategy. It would be a good idea to look beyond the present price trough and reach out to Russia and Iran for gas supplies. China had entered a long-term gas deal with Russia, ensuring steady flow over a longer period. There is a lesson in this for the energy sector wonks in the country. India should also be working out better deals in ensuring supplies from the OPEC sources.

Developments in the global economy have an impact on the situation at home. There is no point in striking a rhetorical stance arguing that India has a huge domestic market, and that it can manage things on its own. Volatility in foreign fund flows (Foreign direct investment as well as foreign institutional investments) will continue to impact the market sentiment at home in significant ways. The RBI and finance ministry have to factor in these developments in making policy decisions.