There IS reason to panic (in India)

I was reading an article in ET today “There is no reason to panic at all” in response to the global financial chaos.

Below, is my rebuttal for this article.

The article does not take into consideration that a growing percent of India’s GDP depends on exports. It was16% in 2015. With the world economy in a meltdown, this will be severely impacted. And this will have a severe impact on the equity markets.

The article does not consider the impact of China’s Yuan devaluation. It is expected to devalue by 15–20% this year. This will put a huge pressure on the Indian Rupee. The Indian Rupee has already been the worst performing currency in the first month of 2016 among most countries.

The current state of the Indian economy will put pressure on RBI to reduce interest rates, adding pressure on the Indian Rupee.

There is a total reduction of demand locally and for exports. All indexes which represent strength in the economy are down, example, property index and stock markets index. Property market has been stagnant since 4 years now.

In spite of hopes, current government has been unable to pass critical reforms. This seemed like the best chance country had due to the overwhelming majority. But complex factors of the Indian democracy means even this is not enough for reforms to be passed by our political system.

The stress in the banking system and its impact has been understated in the article. The article assumes this is just another regular downturn in the global market and India will be insulated just like in the past.

In the beginning of 2008, the BSE Sensex was at 20,000. When the 2008 financial crisis hit, it dropped to 8,700 levels. After that quantitative easing, that is massive money printing by reduction of interest rates to near 0 levels by central banks of all western countries meant that the world economy got a temporary steroid boost. This resulted in huge amount of speculative money entering the system. This boosted capital markets around the world as cheap new money chased equity stocks.

However, this time it is different. The central banks armoury of weapons is over. Their only tool to manipulate the market by reducing interest rates has disappeared. The only option they have is to make interest rates negative. A first, in the history of money. This will have an impact of collapsing the banking industry and the world markets as we know them.

This is not just another downturn. This is a financial meltdown. The current crisis is far bigger in size and will have a major impact on the entire financial system including the Indian equity market.