The global economy is looking towards an uncertain period, with fears of an impending recession; India must be careful
Prospects of a deep recession in the United States, rate hikes and hawkish views from the Federal Bank, European Union uncertainties and the Russian-Ukrainian war are bleeding Indian stock markets. The outflow of Rs 2.71 lakh crore over the past eight months poses a serious challenge to the Indian economy, putting even public deposits at risk.
If Western economies slide into recession, the Indian economy will face an additional challenge in the near future at a time when better terms of trade are needed for growth, as exports could be hit hard. This could further increase the pressure on the trade deficit. “This is an expected outcome of their policy response of raising interest rates to manage the unprecedented levels of inflation they are currently experiencing,” Ernst and Young said in their recent update.
The risk of the U.S. economy falling into recession over the next year doubled after the Federal Reserve raised interest rates 75 basis points last week, according to Goldman Sachs. It says in a note that the likelihood of a recession hitting in the next 12 months has risen from 15% before the rate hike to 30% starting this week.
As the economy collapses and interest rates rise, foreign portfolio investors (FPIs) are returning their investments to the United States. India’s strong REIT outflows over the past year exceed what was seen during the 2008 global financial crisis (GFC), according to analysts at ICICI Securities. The continued sale of Indian equity REITs is proving to be the highest selling spree since the 2008 Global Financial Crisis (GFC) at $36 billion from $28 billion during the GFC. However, inflows of domestic institutional investors into the shaky market have been steady, while benchmarks have fallen around 10% from more than 50% in 2008.
The sell-off that began in August 2021 when there was a brief lull in September has continued unabated since October last year. The withdrawal of REITs from equity markets in India has hit the rupiah hard, with its exchange rate against the dollar falling to Rs 79.2 despite heavy intervention by the RBI to defend the currency.
The bankruptcy in the euro region is deeper than explained. The last voyage of the largest unfinished cruiser in the world to a demolition site for lack of a buyer testifies that the malaise is much deeper than we see. Europe’s economy is in crisis with clogged gas supplies from Russia, an expected food crisis and the wreckage of its growth and economy for simply siding with NATO. The United States has not yet found a check against Russia, except by giving arms to Ukraine.
India, although friendly to both the United States and Russia, is unable to protect itself from the vagaries despite maintaining a delicate balance with the two great world powers. It is marked by high global inflation, higher domestic inflation, rising debt, falling rupiah against the dollar. India’s external debt increased by $11.5 billion in October-December 2021 to stand at $614.9 billion at the end of the quarter, according to data released by the Ministry of Finance on March 31. . The IMF has issued a warning to India. It indicates that external debt, by supplementing domestic savings, can help countries grow faster. But a large stock of external debt can potentially create vulnerabilities and reduce growth prospects. Since the start of the pandemic, many countries have increased their public spending to support the recovery, which has led to an accumulation of their external debt. In other words, he warns to control foreign debt in particular.
Total external debt, which fell below pre-crisis levels in the aftermath of the pandemic lockdown, breached pre-pandemic levels at end-December 2020 and commercial borrowing breached pre-pandemic levels. pandemic at the end of September 2021 and in the short term. – Term trade credit crossing pre-pandemic levels at end-December 2021, according to the RBI.
As India aims for higher, sustainable and inclusive growth, the RBI warns against keeping external debt flows within the estimated threshold to preserve overall macro-stability to head off external vulnerability. That’s a stark warning, especially since savings aren’t growing to meet critical demands either.
REIT investment is not considered a commodity investment. But it is a kind of hedge against external borrowing, foreign exchange reserves and the need to maintain the stability of the rupee. The majority of external debt is private. General government external debt stood at $131.4 billion as of December 31, compared to $132.0 billion at the end of September 2021. Non-governmental commercial external debt, meanwhile, rose to $483.6 billion. dollars, up 36.8% from $471.4 billion. Government borrowing is contracted with international institutions on flexible terms with the lowest risk. In FY 2021-22, India borrowed the most from the International Bank for Reconstruction and Development at Rs 22,362 crore, followed by the Asian Development Bank at Rs 16,802 crore and the Government of Japan at Rs 9835 crore.
During the week ended February 25, India’s foreign currency holdings decreased by $2.22 billion. Since then, more has been lost in the management of the rupee and the external sector. The rupiah remains under pressure. This is a call for the utmost caution. The REIT void is being filled by domestic institutional investors (DIIs), led by LICs, mutual funds and insurance companies. They absorb most of the REIT sales to keep the stock market semblance, but it’s artificial support to virtually subsidize domestic companies, whose valuations are apparently rolling. In other words, public money is injected into faltering private operations, further weakening public institutions.
Institutions are supposed to make independent decisions. But this kind of operation, pushing them into risky operations, is questionable. Most of these organizations, now especially LICs, are at high risk of losing people’s deposits. The RBI, SEBI and other regulators need to step in to check these transactions and purchases, as the market value of many companies with high ECBs, as well as domestic borrowing, are suspect.
What appears to be a harmless withdrawal by some foreign companies has left a deep sense of pain. It calls for a decision at the level of higher regulators as well as the Ministry of Finance to verify the quality of investments made in risky assets. Stock prices are mostly theoretical and speculative, based on the assumption that they will have made gains in the future. Since 1992, the countless crashes or scams have been based on these premises in the Indian stock markets, which have bled the middle class by eroding their investments. Extreme caution is needed at this hour, as even a harmless repetition of failure can cost the Indian economy billions of US dollars, or even trillions.
What looks like a US or European recession, if not handled with caution, could have deleterious effects in India. Sewing in time is the best medicine.
(The author is a seasoned journalist. Opinions expressed are personal.)