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It is a known fact that Indian markets along with other emerging markets ape the US markets. But now it seems problems of Indian markets too are aping those of the US. Just as the US revisits its same set of problems at regular intervals, India too has now fallen in the same trap.
Since the sub-prime crisis, US economy has been able to survive largely on account of heavy dose of liquidity pumped in by their government. This has led to its debt increasing rapidly. Unlike in India, US government have a ceiling or a limit to the debt it can raise. Increasing it requires permission of the congress.
US government has been able to meet its expenses and repay its debt by raising more debt. Thus if the debt ceiling is not increased there is a scope of it defaulting on its loans. US government periodically increases the debt limit, and every time it needs to do so, markets are volatile as the opposition (Republicans) finds some reason or the other to arm-twist the government.
Another factor which has been revisiting the US market with increasing frequency is the 'tapering' of its liquidity infusion program. Markets globally have benefited from the liquidity infusion and any news on the flow being reduced sends the bears on a high.
Unfortunately the problems of US are contagious in nature. It has reached Indian shores, though it manifests in a different form.
Problem of weakening rupee and rising interest rates have shaken Indian equity markets at regular intervals. A weak rupee which led to high interest rates sent the investors scrambling in mid-2013, when the government managed to handle it by announcing a series of measures that temporarily led to a recovery and stability of these markets.
But these measures like the dollar purchases for oil marketing companies or the currency swap measures announced were essentially buying time and kicking the can of problem forward. But now we have reached the can once again.
Currency has again started to fall as oil companies are approaching the open market with their purchases and the currency swap window closes by end of November. Foreign investors are withdrawing their debt investment in the country leading to a rise in interest rates. Since June 2013, FIIs have steadily withdrawn Rs 75,384.1 cr or $ 12 bn from debt instruments.
Stability was restored in the currency market due to the strong inflow of roughly $17.5 billion dollars through the FCNR (B) swap scheme announced by the RBI governor.
This is the biggest threat to markets going forward and the biggest challenge to the RBI governor. If FII outflows continues in December, rupee will continue to weaken sharply. This will shake the FII investors in equity markets and we can enter the new year on a grim note. But even as we enter the new year we have the debt ceiling issue of the US revisiting us, which can add to the volatility.
The only way out of these recurring problems are strong policies which will infuse growth. Unfortunately, government in both the countries have been kicking the can forward, but every time they do so, the can increases in size. It's not long before kicking it any further, would cause more damage to the leg that does it.
