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Stock market woes may have little to do with health of economy

Mini

Where is the market headed? Many market watchers are wondering if the recent steep fall in the market is a reflection of the health of the economy. It’s tough to blame the market fall on the economy, which has largely been doing well.

Stock market woes may have little to do with health of economy
The steep fall in share prices over the last month is causing many market watchers to wonder if it is a reflection of the health of the economy.
It’s tough to blame the market fall on the economy, which has largely been doing well. GDP growth in Q2 was above the RBI's expectation, but the full year may not outstrip the central bank's forecast of 9.5 percent, thanks to the feared impact of Omicron. Growth is largely on expected lines with an upward bias, if any.
Consumer inflation too isn’t as burning a problem (unlike in the US or the UK). It came at 4.91 percent in November, way below market expectation of 5.1 percent. It can become a burning problem if the CPI trends towards the WPI which stands at 14.2 percent. But WPI has a lot of elements like furnace oil, bitumen, plastics and metals, which aren’t part of the CPI. Some of these commodities are seen moderating. CPI is seen rising to 5.7 percent, may be even 6 percent in January-February, but is seen peaking off.
There is a minor worry over trade deficit and current account deficit. Since September, trade deficit has ballooned to over $20 billion a month and if this is the situation over the next six months, it can spell trouble. However, a falling rupee can course correct the trade deficit. One issue in the macros that can worry the markets is the fiscal deficit. While tax collections have been robust, the divestment proceeds are expected to fall far short of the government’s target of Rs 1.75 lakh crore. This year’s fiscal deficit of 6.8 percent may be absorbed by the markets, but if the bond markets get a feeling that next year’s deficit isn’t meaningfully lower, bond yields can rise – abetted by global tightening and an RBI which has one arm tied behind due to inflation. The market also is losing faith that India’s inclusion in the global bond indexes can make a seminal difference.
Those are the minor worries from the economy – a possible rise in inflation if crude jumps, a possible rise in yields if fiscal deficit doesn’t recede, and a distant worry on current account deficit. There is nothing to break the market’s back immediately.
There are two things to keep in mind here:
  • Growth is definitely uneven, very unequal. So, there is a worry that GDP can’t be sustained since the middle class is not growing, at least not at the pace it did till 2010. So post-FY23, Will we slide to a lower normal? But it is hard to see this worrying the markets right away.
  • A bigger worry is a sudden disappearance of liquidity, which can lead to defaults by brokers, investors, NBFCs, borrowers, credit card holders, crypto dealers, etc. Doesn’t seem to be around the corner, but as Warren Buffett said: "Only when the liquidity (water) ebbs do you know who is swimming naked."
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