Rapid spread of the coronavirus across the globe is resulting in cuts in GDP growth estimates
Falling crude oil prices have added to worries and have aggravated the slump in equities
Shares of Tata Consultancy Services Ltd, usually considered a safe haven because of its steady cash flows, fell nearly 7% in the sell-off on Monday. Shares of Reliance Industries Ltd fell by an uncharacteristic 12%. Clearly, there were no safe places among stocks.
The rout in equities has worsened with falling crude oil prices entering the equation. In the past, a sharp fall in crude oil prices has been accompanied by a sell-off in risk assets such as equities. The sharp fall in US Treasury yields clearly shows there is a rush for safe havens.
The fall in crude oil prices is because of a price war between Saudi Arabia and Russia. It should also be noted that the International Energy Agency estimates demand for oil will fall in 2020. This has only added to the concerns about the global economy, which is reeling after the rapid spread of Covid-19.
Further, lower oil prices heighten the risk for oil-producing countries, who have strained budgets. As such a global slowdown will pose a serious challenge to debt repayment capability of many companies globally, with corporate debt continuing to rise at a sharp pace in recent years.
“When the risk of delinquencies begins to surface in global markets, the first reaction of investors is to withdraw money from risk assets. They then start pulling money out of emerging markets and sell whatever can be monetized. We are seeing such a situation," noted a market analyst, on condition of anonymity.
India remains a net oil importer, but its gains from the drop in crude oil prices will be limited. It would reduce the pressure on the headline retail inflation, which is good news for the Reserve Bank of India, which has not been able to cut policy rates because of the expected rise in retail inflation.
However, nothing much may change as far as the fiscal deficit is concerned. “There is unlikely to be a net positive effect on the fisc from the fall in oil prices, if this sustains. There are several offsetting factors involved," said A. Prasanna, head (research) at ICICI Securities Primary Dealership Ltd.
Besides, countries in the Middle East that are predominantly oil-based economies, account for more than half of remittances to India. As such, the impact on the economic growth of these nations cannot be ignored. That said, the impact on remittances could be lagged, say economists.
Meanwhile, the rapid spread of the coronavirus epidemic across the globe is resulting in reductions in growth estimates. Moody’s Analytics has already lowered growth forecasts for the global economy and cut estimates for India too, to 5.3% for FY20.
The Organisation for Economic Co-operation and Development recently cut India’s gross domestic product growth rates for 2020 from 6.2% earlier to 5.1%. There could be more downsides if the coronavirus epidemic spreads. After all, analysts are still expecting some growth, whereas oil demand estimates suggest a decline in economic activity in 2020. The worst may be yet to come.