The four key markets across geographies; Dow, FTSE, Nikkei and Nifty have almost moved in tandem in 2020. The extent of negative returns may have varied but the correlation continues to be quite high as indicated by the graph. That means, a number of global cues will have a clear bearing on Indian market.
Fed rate guidance on rates and liquidity
One reason Indian markets get interested in the Fed rate guidance is that it sets the tone for global monetary policy. Currently, Fed rates are at the lowest range of (0.00% - 0.25%). The only way ahead is for the US Fed to go into negative rates like large parts of Europe and Japan. That is why, Indian markets are more focused on the guidance given by the Fed. For example in its 10 June policy announcement, the Fed clearly underlined that rate hikes were ruled out till the end of 2022. That gives central banks like the RBI confidence to keep rates at historically low levels in India.
Then there is the liquidity issue. Indian markets have long been hungry for liquidity. It is normally seen that when the US follows a policy of keeping liquidity comfortable, Indian markets see strong capital flows. Currently, the US Fed is buying bonds worth $80 billion of treasuries and $40 billion of MBS each month and plans to sustain the pace. Now, $120 billion is a lot of liquidity infused each month and emerging markets like India will gain.
Fed outlook on GDP growth and jobs
This is again one of the most important cues for the Indian markets. In the 10 Jun policy announcement, the Fed projected US GDP to contract by 6.5% in 2020 and unemployment level at 9.5% by the end of the year. On the growth front, a severe contraction in the US may have two negative implications. Firstly, it will mean that sectors like IT, auto ancillaries, chemicals and pharma that rely on exports to the US could face weak demand. Secondly, such a sharp contraction combined with 9.5% joblessness will push the Trump government to sharpen focus on “America First”. That could reduce farming out of orders to Indian companies or allowing Indian software engineers to work in the US on liberal visa terms.
Carry trades and portfolio flows
For a market where nearly 21% of the Nifty stocks are owned by foreign portfolio investors (FPIs), their impact is fairly outsized. Since Jan-20, the global crisis due to COVID-19 has resulted in many FPIs adopting a risk-off approach. These FPIs prefer the safety of developed markets, even if it entails a lower rate of return. Another factor determining global portfolio flows is the existence of carry trade. A carry trade comes into existence when a trader is able to borrow in a stable currency like Yen at low rates and deploy the money in high yielding markets like India. The risk here is that if the returns in India fall below a certain level then carry trade may not be justified. Secondly, success of the carry trade also predicates on the stability of the rupee.
China’s appetite for commodities
This is often an underrated factor it influences a number of sectors ranging from metals, minerals, electronics etc. China accounts for more than 50% of the consumption of most industrial metals including copper, aluminium and zinc. China also accounts for 13% of the global oil consumption. Any weakness in China is not great news for Indian markets. For most industries ranging from auto to electronics to pharma, China is an important link in the supply chain and any slowdown would mean the supply chain gets disrupted. Weak growth in China increases the likelihood of a Yuan weakening. That is normally negative for the INR and the Indian markets.
Crude oil prices still hold the key
When it comes to oil it is said that high prices are bad but low prices are worse. That applies to the Indian economy too. The Indian economy relies on imports to meet ~80% of its oil daily requirements on. Weak oil prices create a demand vacuum and also negative price effect in most of the oil extraction and refining companies. High oil prices like the $100+/bbl that we saw prior to 2014 can add a huge burden to the Indian budget as well as to overall inflation.
Of course, there are many more global factors of a granular nature that impact Indian markets. Broadly, the US economics, China economics, portfolios flows and oil hold the key.