A chilling combination of reasons—past defaults, present insecurities and uncertain future expectations—has markets spooked and it will require more than empty assurances to restore confidence.
Inter-connectedness between bond, currency, equity and commodity markets—all of which are experiencing some anxious moments—has added to the unease.
Topping the list of worries is the unfolding saga at Infrastructure Leasing & Financial Services Ltd (IL&FS) and the expected ripple effects if it goes belly-up. There have been assurances of liquidity support and capital infusion, but in the absence of any concrete action so far, investors have started doubting the promises. The government owes money to the company—as payments for infrastructure projects—but has been reluctant to announce any firm intentions of paying up.
Because IL&FS has borrowed from multiple investors, the negative sentiment is reflected across non-banking financial companies (NBFCs). Shares of NBFCs have seen a sharp decline since Friday, triggered by unsubstantiated rumours of a liquidity issue at Dewan Housing Finance Ltd (DHFL). While the DHFL management has clarified that all’s well with their company, other NBFCs are still reeling under selling pressure.
With liquidity occupying the market’s collective mind-space, all eyes are on RBI’s monetary policy announcement on 5 October. The central bank has its menu of worries to pick from: rupee depreciation, rising inflationary expectations, market liquidity concerns and a widening current account deficit are some of them. While there are expectations of another interest rate hike, markets will be praying that RBI governor Urjit Patel and the monetary policy committee will leave liquidity untouched. Or, at a stretch, even provide a solution to the NBFC problem.
But, even before RBI can play its hand, US’s Federal Open Market Committee will be meeting on Tuesday and Wednesday.
With expectations of another interest rate hike and an overall hawkish stand, this could mean further outflow of foreign portfolio investments (FPI) and additional pressure on the dollar-rupee value. Of the 14 trading sessions in September so far, FPIs have been net sellers in eight sessions, while domestic institutional investors have been net buyers in 11 sessions.
Pain is also radiating from commodity markets. Spot prices of Brent crude oil crossed $80 a barrel, but a weekend decision by the Organization of the Petroleum Exporting Countries (Opec) and allies to not boost production any further to offset Iran’s plunging crude exports has fuelled fears of crude prices touching $100 in the future.
There is an additional fear being baked in: in case of an unplanned outage in Nigeria or Libya, the resulting shortage could adversely impact prices.
But even at $80, the resultant pressure on India’s oil import bill and the widening current account deficit will make Jaitley’s task of economic management that much tougher. The ongoing US-China trade war and the shrinking global trade volumes will add to the troubles.
With three state elections soon, and general elections scheduled for 2019, the government’s ability to manage the economy or assuage market sentiment through decisive action promises to keep the market on tenterhooks.
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