Wednesday, 26 August 2015

India & the Chinese Economic Slowdown

See four charts that show how the China-led selloff is affecting India. 

Bad news from China has sparked a firestorm in the developing countries that feed its vast industrial machine, leaving a swath of economies with few good ways to escape a crunch.

But countries that have reduced their external vulnerability have fared at least slightly better in the latest rout. India’s currency shed a quarter of its value over a few months in 2013 after the Federal Reserve hinted it might reduce its monthly bond purchases. At the time, India relied heavily on foreign capital to fund imports.

But since then, it has built up foreign-currency reserves and narrowed the trade deficit. Prime Minister Narendra Modi has championed India as an attractive hub for low-cost manufacturing.

The rupee still slid on Monday, though, closing down 5.5% since the start of the year. India’s benchmark stock index dropped 5.9%, to its lowest level in a year.

“As far as India is concerned,” Finance Minister Arun Jaitley said in New Delhi, “our response at this stage is very clear: We have to strengthen our own economy.”

On Tuesday, Indian shares began to recover as investors started to buy stocks at lower levels after Monday’s fall. The S&P BSE Sensex was up 1.2% and the National Stock Exchange’s Nifty index rose 1.4% on Tuesday morning.

The rupee also recovered slightly, trading at 66.43 against the dollar, compared to Monday’s close of 66.64.

Why India Stands to Benefit From China Slowdown and Global Reaction 

India’s economy has been insulated from the turmoil in emerging markets by a long-standing handicap: It isn’t an export powerhouse.

For years, growth in India has been fueled more by domestic demand—not, as in China, by manufacturing goods for sale abroad.

Now India’s resilient consumer spending is an advantage as demand decelerates almost everywhere else. It is luring companies to produce in India and, the government hopes, can help spark a belated industrial revolution in the country of 1.2 billion.

Jayant Sinha, India’s minister of state for finance, said this week the Chinese slowdown and its world-wide fallout could provide a chance for India to “take the baton of global growth.”

Mumbai’s benchmark stock index ended Wednesday down 1.2%, having slid 8.5% in total since the People’s Bank of China moved to devalue the yuan on Aug. 11. The rupee has lost 3.4% since then.

India hasn’t been rattled as badly as Brazil, Russia or South Africa. Its international reserves are ample, and it isn’t highly dependent on foreign capital to fund imports.

India saw more than 6% shaved off the value of its stock market Monday and its currency fell to a near two-year low as a global selloff in stocks sped up.

The rout, prompted by the accelerating selloff in Chinese shares, produced the steepest one-week decline in years for many major markets.

But India and its currency are better braced for the storm than most others in the neighborhood and certainly than in 2013, when talk of an end to easy-money policies in the U.S. prompted a slide in the rupee against the dollar, making it one of the worst-hit currencies, while stocks too fell by over 8% in August 2013.

India is now in a stronger position in terms of international trade and has more foreign currency reserves. Here are four charts that show how Indian shares and the rupee have performed in recent weeks during what has become dubbed by some on social media as the #GreatFallofChina.

The Wall Street Journal
The more than 6% fall of India’s benchmark S&P BSE Sensex index on Monday, mirrored declines in global markets. The index has been choppy in recent weeks, as subdued corporate earnings offset cheer from a strengthening economic recovery. But Indian authorities quickly sought to calm local investors during the slide. “I wish to reassure the markets that our macro-economic factors are under control as the economy is in a much better position relative many other economies,” Reserve Bank of India Governor Raghuram Rajan said on Monday.
The Wall Street Journal
The rupee has weakened a little over 4% to 66.63 rupees against the U.S. dollar since the yuan devaluation on Aug. 11. But it’s still well short of its all-time low of 68.80 reached in August 2013, when emerging markets slumped in reaction to the possible tightening in the Federal Reserve’s monetary stance. Back then, India’s current account deficit stood at a record 4.8% of gross domestic product while foreign exchange reserves were at about $280 billion. 

Now, the deficit has shrunk to 0.2% of GDP, while reserves stand at $354 billion — near an all-time high — providing the country’s central bank with enough firepower to intervene in the currency market and stabilize any sharp fall in the rupee if necessary.
The Wall Street Journal
The rupee is among the Asian currencies to have stood up best against the U.S. dollar over the past few months as foreign investors pulled out of risky markets and the U.S. economy slowly recovered. 

The Indian currency has fallen 4.3% against the dollar since May 25. By comparison, the Indonesian rupee has fallen 6%, the Korean won has declined 8.5% while the Malaysian ringgit has slumped 14.8% against the dollar during the period.

Analysts believe India has been sheltered because it has a comparatively smaller trade with China and so less to worry about following the yuan devaluation. In addition, an improving domestic economy is also helping shield India from global headwinds.
The Wall Street Journal
The rupee has also performed well against most Asian currencies, barring the yuan, reflecting its reduced vulnerability to external shocks. For example, it has gained over 12% against the Malaysian ringgit and 4.4% against the Korean won since May 25. 

“I have not the least doubt that this turbulence is transient and temporary,” Finance Minister Arun Jaitley said on Monday. “Our domestic indicators are extremely positive and therefore I have no doubt that once these transient trends are over, markets particularly in India will settle down.”

Indian Industries Set to Shine as the World Slumps

The meltdown in China is rattling markets across the globe and India is no exception.

The massive selloff of stocks, currencies and commodities has triggered concerns that the world is headed for a repeat of the financial crisis of 2008 and 2009.

However the Indian economy has always been out of sync with other markets and analysts say that could be a good thing in tough times like these. In fact the tumult actually holds a few blessings in disguise for some Indian industries.

This story from The Wall Street Journal explains how India could actually end up being helped by its idiosyncrasies.
Here are five sectors that could benefit from the worldwide worries.

1 Consumer goods
The fall in commodity prices will bring down the raw-material expenses for consumer goods companies while domestic demand for their products will likely remain firm, says Anand Shah, chief investment officer at BNP Paribas Asset Management India Pvt. Ltd. Nomura shortlists Hindustan Unilever and Asian Paints as its top picks. It says an improving macro environment and lower input prices will drive strong profit growth for these companies.

2 Banking
Investors in India hope the country’s central bank will follow China’s lead by cutting interest rates to boost the domestic economy. A Reserve Bank of India rate cut looks possible before the September monetary-policy meeting, says U.R. Bhat , managing director at Dalton Capital Advisors, a Mumbai money management firm. Banks are likely to be one of the biggest beneficiaries of a cut as lending growth will pick-up and their bad loan ratios will come down.

3 Autos
Automobile manufacturers are in a sweet spot as lower oil prices and interest rates make it less expensive to buy and drive cars. Meanwhile, falling commodity prices will boost profit margins by lowering costs, says Nomura. It picks Mahindra & Mahindra as its favorite auto company.

4 Exports
Both technology and drug exporters have been outperforming recently as a weak rupee makes them more competitive abroad and lifts the rupee value of the dollars they earn. The rupee hit a near two-year low this week following weakness in other regional currencies after the devaluation of Chinese yuan.

5 Fuel retailers
Indian fuel retailers often have to shoulder losses to sell some fuels, including cooking gas and kerosene, at government-set prices. As the prices of these commodities fall with oil, companies like Indian Oil, Bharat Petroleum Corp. and Hindustan Petroleum Corp. can start to make money on these subsidized fuels.

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