More pain ahead but India on strong foundation

Falling crude prices and talks of Greece pulling out of the euro currency once the elections are over by the third week of this month could lead to severe ramifications across global financial markets. 

As for India, the rupee remained fairly steady at 63.56 to a dollar, exhibiting robust economy and shrinking current account deficit due to falling crude price.

“On a day when global markets tanked, the rupee, by registering a marginal fall, outperformed other emerging market currencies, which is a recognition of lower CAD, fiscal deficit and comfortable reserves,” said K Harihar, treasury head at FirstRand Bank.

“The correction (in Sensex) was too steep to be accounted only by FII flows and developments in the eurozone and oil markets,” said U R Bhat, managing director at Dalton Capital (India) Advisors, a foreign institutional fund.
Most market players expressed mixed views over the crude slide and threat of Greece pull-out from the euro were interlinked.

“The Greece crisis and oil are not connected,” said Keki Mistry, vice chairman and CEO of HDFC.

“There has been a slowdown in China, drop in demand for oil, and a nervous Opec that is keeping prices low by not cutting output,” he said.

The concern worldwide is also due to business exposures to Greece. If the country opts out of euro, there will be a crisis across the eurozone. “If not a fear syndrome, why else would it impact India?”, asks Mistry.

Not all agree that talks of Greece pullout from euro and the slide in crude oil are disjointed and independent issues. Both would have their share of woes across major geographies leading to another fear that fund inflows to emerging markets could just dwindle. 

Many experts compare the panic to the S&P downgrade of US from triple A to double A ‘plus’ in 2011 or the formation of the UPA-I government with left-wing partners in 2004 where there was a fear that money could flow out of the US and India markets respectively. However, the dollar gained against major currencies and the Indian equity markets scaled new peaks in the respective periods.

“There is no logic when despite the US downgrade, its currency was safest in the world,” said Mistry.

The Greece elections point towards a left-wing coalition government and has got the euorzone jittery over the new government’s continuance of tough austerity measures imposed by the ECB and the IMF to tide over the 2008 financial crisis.   “If Greece discontinues with its austerity measures the country would automatically get pushed out of the euro currency which means more pain in the offing before eurozone economy stabilises, forget growth,” said an economist at a foreign-owned bank.

“The price to pay will be unimaginable, as countries that have loan exposures to Greece will rock the world economies once again.

“Leftist governments, when in power, are generally responsible as we observed in the past during India’s 2004 government, for example. The same logic goes for Greece,” said Bhat.

But then there is indeed a connect between the two developments – crude and Greece – as economies get hit across, he opined.

Experts are worried over the oil slide, while it has helped India in stemming subsidies to oil companies and forex savings of $40-50 billion annually thus improving forex reserves and containing current account deficit, the honeymoon cannot go on as economies of oil exporting countries like Russia, Gulf countries, Venezuela etc have been adversely hit.

It is perplexing to many as to why Saudi Arabia with oil reserves of 267 billion barrels continues to pump more oil despite a slowdown, unless it is taking on the US shale boom at 11 million barrels a day and wiping out competition.

As long as prices are coming down because of global slowdown there is no cause to worry, but if they are to shakeout marginal shale gas players then there is a bigger issue facing the economies dependent on oil imports, say economists.

“The worrying factor is if crude goes further down and wipe out smaller players supplying oil at $40-$70 a barrel. Once this occurs, supply will again be a concern and prices could start firming up. It all depends upon how soon, the prices could dip to such levels,” said Bhat.

For the moment it is the absence of buyers that is causing the markets to fall. On Tuesday, FIIs’ net equity selling stood at Rs 1,570.76 crore against which domestic institutional investors purchased Rs 1,189.65 crore –a net sale of Rs 381 crore, not convincing enough to pull down the Sensex 854.56 points!