A tough task

India has to stand out well against worried markets

Every global market saw a big sell-off on Tuesday as fears arose about Greece being forced out of the European Union. International crude oil prices also collapsed to new five-year lows. India's benchmark stock indices fell three per cent - their steepest drop since September 2013. Heavy selling by foreign institutional investors, or FIIs, led to steep falls in the Nifty and the Sensex.

It is early in the year. Most FIIs (who use the calendar year as their accounting year) have not firmed up country-specific allocations yet. The recent trading patterns indicate that 2015 will be marked by high volatility and uncertainty across financial markets. While India is expected to register higher gross domestic product (GDP) growth, it will be an outlier. Most emerging markets have poor 2015 prospects and FII allocations are likely to fall. Of the so-called BRICS (Brazil, Russia, India, China and South Africa), China has pared its GDP targets; Russia is in crisis; Brazil and South Africa are facing stagnation. Under the circumstances, it is possible that India will suffer from "contagion", even if earnings and GDP growth improve.

Other risks abound. Growth is slowing across most major economies, with the exception of the United States. This has led to the dollar strengthening against every other currency of note. Low global demand is also the reason why commodity prices (crude oil, gas, coal and metals) have fallen. There are many simmering potential flashpoints such as Russia-Ukraine, the Islamic State of Iraq and Syria in West Asia, nuclear-related sanctions on Iran and North Korea, and Afghanistan. Escalations in tension in any of these hot spots could reinforce generally bearish sentiments. All this makes it hard to envisage an export-led recovery in India and so, the economy must pull itself up by its bootstrap with the help of higher local investment and consumption. It is hoped that reforms could start to take hold in 2015-16 and India should also be a beneficiary of lower crude oil and coal prices since it imports both fuels.

Meanwhile, Japan and Europe have deflationary concerns. The Swiss central bank recently imposed negative interest rates. The euro is at multi-year lows and a Greek exit would be another stress point for the unified currency. Under the circumstances, many FIIs may head for the safety of United States Treasury debt, cutting exposure to markets denominated in other currencies. Traders are hoping that central banks across the world will act to maintain liquidity.

The United States Federal Reserve's statements in mid-December are interpreted to mean that the Fed will wait "patiently" until some global equilibrium is reached before it raises policy rates. The European Central Bank may put together some monetary reflation plan, even as the Japanese central bank implements its own version of quantitative easing.

In India, of course, the Reserve Bank of India (RBI) will be expected to start cutting rates soon. Whether it actually does so, and the pace at which it cuts rates, will depend at least partly on the RBI governor's assessment of the Budget and the government's ability to deliver fiscal consolidation. FII allocations will also be heavily influenced by their reading of this document. There are high expectations that the Budget will lay out a clear blueprint for reform and long-term growth. If it does so, the Nifty could yet be a rare example of positive returns in what promises to be a difficult year for global investors.