Why did the Indian stock market crash today?
The Indian stock market crashed Monday morning, losing over 1,000 points as global markets continue to be hammered on all fronts. Its national currency, the rupee, sank to a two-year low as a result of large scale sell-offs, with investors deeply concerned about contagion from China’s volatile markets. To put it into perspective; all 30 of the largest Indian stocks on the BSE Sensex (Bombay Stock Exchange) ended Monday with a loss. (Source: Business Standard, last accessed August 24, 2015.)
It’s going to get a lot worse before it gets better, and there’s no way to sugarcoat the tough times ahead. Here’s a quick recap of what’s happening in the subcontinent’s markets, and four things to consider when analyzing today’s Indian stock market crash.
The Rupee Has Been Declining to a Multi-Year Low
Lately, India’s currency is behaving exactly like those of other emerging market economies. China’s abrupt decision to devalue the yuan two weeks ago has caused many currencies to decline to some degree, and the rupee is no exception. The fear of a looming currency war hangs over financial markets, as analysts worry about other countries matching China’s strategy to make its exports more competitive by making them cheaper to purchase.
Following a stable run, the rupee is now trading at 67 to one U.S. dollar. (Source: NDTV, last accessed August 24, 2015.) This would generally mean a spike in Indian exports, but the recent economic slowdown in the European Union, India’s largest export market, makes this prediction uncertain. (Source: Economic Times, last accessed august 24, 2015.)
There is no clear indication of where exactly the rupee will gain upward lift, or how investor confidence will be restored in India’s currency.
Much of the Loss in Indian Markets Was a Sell-Off of Chinese Bourses
The BSE-30 Sensex lost more than 1,000 points on Monday, as investors fled Chinese bourses on fears of impending economic collapse in the Middle Kingdom. (Source: The Wall Street Journal, last accessed August 24, 2015.) These fears are not unfounded, as the Shanghai Share Index fell by 7.7% to a five-month record low, causing both Indian and international traders to rush to minimize their exposure.
Over $5.0 trillion has been lost on global equity markets since China’s stock market crisis began, as investors become increasingly skittish about emerging market economies. (Source: Bloomberg, last accessed August 24, 2015.)
China Appears to Be Losing Control of its Economy
Contagion from China is also partly psychological, which affects investor behavior towards India. Indicators from China are certainly not favorable, as Beijing is beginning to look increasingly feeble in its efforts to stabilize its stock market crisis. This has caused an investor stampede, as people are not only pulling investments out of China but also other major emerging markets like India.
Indian Officials’ Reassurances May Not Be Correct
India’s central Bank governor Raghuram Rajan reassured the public at a banking conference that Asia’s third-largest economy was in a strong position to weather the storm however, citing the country’s solid financial fundamentals and considerable foreign exchange reserves. (Source: Reuters, last accessed August 24, 2015.) Indeed, other banking officials have claimed the current crises in the Indian stock market are “transient,” and largely the result of a ripple effect from the surprise Chinese currency devaluation. (Source: Business Standard, August 24, 2015.)
But can these claims be believed?
Pointing towards the crisis’ causes being international instead of domestic obscures the real issue; India’s economy is export-driven, and highly exposed to international financial developments. Pointing the finger at China and talking up the strength of your fundamentals while your stock market crashes is disingenuous at best.
When you combine the rupee’s decline, the losses of the BSE-30, and faltering investor confidence in formerly attractive emerging market economies such as India, you can bet that tough times lay ahead. No amount of wishful thinking can avert a possible global economic collapse if it comes to that, and India is in a precarious position to feel its full effects.