Statsguru: Six charts explain rough ride in the financial markets

Geopolitical tensions, excess volatility, and tightening liquidity marred financial markets in the first half of the fiscal year 2022-23 (FY23).

The equity segment showed declines across the board. Indices tracking global, emerging markets, and Indian equities, all ended lower at the end of the period than they were at the beginning. India has been relatively resilient with only a single-digit decline. Global and emerging market indices have lost a fifth of their value (chart 1).

Those who sought safety in gold would have seen a double-digit decline in the value of their investments. It has finished lower at the end of every month since the beginning of the financial year (chart 2).

Interest rates have been moving up. The US has been tightening aggressively and the Reserve Bank of India is also looking to mop up excess liquidity amid higher inflation. Crude oil prices above $100 a barrel for a large part of FY23 adversely affected inflation, though prices have lately been cooling. The 10-year government bond yields have more than doubled since December in the US. It has become more expensive to borrow in India as well (chart 3).

The amount of money the US central bank pumped into the global financial system has been a key market driver since the global financial crisis. Conditions, however, are becoming tighter (chart 4). Less money in the global financial system reduces foreign flows into markets such as India. Foreign portfolio investors are net sellers in Indian bond and equity markets for the second year in a row.

India’s currency has done relatively better than other major emerging markets, barring Russia. Geopolitical manoeuvring has made the Russian rouble among the best-performing currencies during this period (chart 5).

The larger trend of market volatility is not without real-world effects. The International Monetary Fund has downgraded global growth between forecasts issued in April and July. Emerging markets have seen a decline in expected economic growth, so has India (chart 6).
 

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