Can the RBI and govt come to the rescue of investors?

The broader markets are on a big selloff. Screens look scary. Investors are deeply concerned. Many are questioning the once-vibrant buzz around the “India Story” and wondering whether the RBI or the government can wield a magical wand to halt the bleeding in their portfolios.

Is the current market turmoil unique to India, or is it part of a broader trend affecting emerging markets (EMs)? Let us delve into this question first before returning to address the original question raised in the title.

If one looks at the global markets, at the broader level, EMs are underperforming the US and within the EM basket, India is underperforming the EM. That has been the story for the last three months and India’s underperformance against the EMs has widened this month to become more acute. Looking at the numbers, MSCI EM has returned negative 4% for the trailing three months against the positive 3.24% returns for the S&P 500 in the US (as of 27th Jan). Within the EM, India has done much worse with the broader BSE 500 returning negative 7.83% for the same period. For January (as of 27th), while EM has tried to come back with a positive return of 1%, India’s underperformance widened with a fall of over 6% in BSE 500.


For FIIs, going by this pattern of underperformance against the MSCI EM, the concern certainly goes beyond the rising dollar index and stronger treasury yield. India is being singled out for sell-off, on localised concerns of slowing growth amid expensive valuations.

FIIs may be genuinely worried about the probability of the cyclical slowdown turning into a medium-term structural slowdown. While RBI and the govt may be hoping that the slowdown is temporary on account of lower capex spending from state and central govt agencies, slowing credit growth amid muted consumption has sent alarm bells to the investment community who now worry that the sluggish growth may be here to stay for a while. Opinions are deeply divided among analysts community on whether this is a temporary slowdown or something more structural that can cause medium-term damage.

Where do we stand on this?

To understand the current scenario, it is critical to look at how a typical growth cycle pans out for the economy. In the early stage of the cycle, growth is primarily driven by consumption. As the cycle advances, private capex takes over, fueling further growth in consumption. This transition creates structural and sustainable growth. In India’s case, growth over the past two years has been powered by two key drivers: urban consumption

and government capex. The missing piece was growth in private investments. However, as consumption growth has matured, the private capex was expected to take the lead, driving the next phase of growth and creating a virtuous cycle of increased consumption. But unfortunately, the huge surplus capacity globally (esp. the Chinese) arising from sluggish global growth has deterred any recovery in private capex in India. This delay is now weighing on the overall growth trajectory for India.

Now coming back to our original question, can Govt and RBI intervene and support the growth through fiscal or monetary stimulus? Do they have the dry powder to unleash? Given the govt’s focus on fiscal consolidation in terms of the stated objective to rein in deficit to 4.5% in the coming year, the Govt. has limited headroom to unleash any material policy measure in the upcoming budget. That leaves the onus to RBI. Here again, one has much less to hope for. Of course, cyclically, we are at the top of the tightening cycle that leaves a lot of elbow room for rate cuts. While that leeway is there with RBI, the challenge comes from the elevated US interest rates and from the strong dollar index. Given the conflicting priorities between keeping the currency stable and cutting rates, RBI might be pushed to go for liquidity measures like the Open Market Operations (OMO) announced this week than large rate cuts. Even if it initiates rate-cuts, it is likely to be a shallow rate-cutting cycle. Hence, it remains uncertain how much this will help revive private investments, especially in a global environment burdened by surplus capacities and sluggish growth in key regions such as China and Europe.

So, going by preceding analysis, the combination of subdued private investments, muted urban and rural consumption, and limited fiscal headroom for government stimulus suggests that it may take time before we witness high double-digit earnings growth. Adding to the challenge is the US exceptionalism, marked by a stronger dollar and elevated interest rates, which is likely to keep Indian markets in huge check.

With much of the price damage already factored in, especially in the broader markets, going forward, markets are likely to move sideways with bouts of intermittent volatility in the near term. This trend may persist until the base effect of slower growth comes into play by the June quarter. Meanwhile, investors unrealistically hoping for a rescue from the government or monetary authorities are likely to be deeply disappointed!