India’s stock markets have lost all gains made so far in 2018

• As of 5 October, India’s stock markets suffered their largest weekly fall in two years, wiping out all their gains in the year to date.
  
• This was due to a number of factors such as the RBI’s decision to keep rates unchanged, the potential default of IL&FS and a massive outflow of foreign funds.
  
• In September, Goldman Sachs predicted that the world-beating streak of India’s equity markets would come to a halt.

It hasn’t been an easy year for emerging markets. As concerns of a trade war between the US and China have risen and the US Federal Reserve has tightened rates, foreign money has flown back from these countries to developed markets in search of safer, higher returns. The stronger dollar has made it harder for developing countries to service their debts. Oil prices have risen, which has hurt the trade deficits and led to a depreciation in the currency of oil importers.

However, despite a host of external and internal pressures and a declining currency, India’s stock markets had so far resisted the slump, becoming Asia’s best performing equity markets in the year to early September.

However, things have changed in recent weeks. At the end of the first week of October, India’s two benchmarks indices- the Sensex 30 and Nifty 50- had lost the gains they had made in the year so far. In fact, as of 5 October, India’s stock markets suffered their largest weekly fall since 2016.

This was due to a number of reasons, all of which are linked in some form to the declining rupee and rising oil prices.

Firstly, the Reserve Bank of India (RBI) opted to keep repo rates on hold following two consecutive rate hikes, which took markets by surprise. Secondly, the potential default of IL&FS, India’s largest infrastructure lender, has sparked fears of a sector-wide liquidity crunch among non-banking financing companies and tighter regulation in the future. Thirdly, foreign investors withdrew a record ₹93 billion from capital markets between 1 October and 5 October, indicating a general lack of confidence in India’s short-term economic prospects.

The plunge was expected. In September, Goldman Sachs predicted that the world-beating streak of India’s equity markets would come to a halt owing to the pressures of a falling currency, overvalued stocks and the uncertainty posed by upcoming national elections.

The weakness in stock markets is expected to continue in the short-term. The IL&FS crisis is far from being resolved, with economic affairs secretary Subhash Chandra Garg forecasting an incipient turnaround by mid-2019. Oil prices are set to increase further as US sanctions on Iran kick in and the US Federal Reserve’s tightening cycle will cause other central banks to follow suit. Things will likely get worse before they get better.