Should we worry about US economic situation?
11 Oct, 2022 - 12:05PM
There is concern amongst stock market investors related to US monetary policy and the wider global environment where one can see the Ukraine war causing an energy crisis in Europe, China going through an economic slowdown with its zero-CVOID protocols and a real estate led credit crisis and US struggling to control inflation after a decade of unbridled growth.
The concerns amongst Indian investors are centred around two areas – the first being the rapid appreciation of the US dollar and the second being the plausible impact of a US recession on India’s economy and stock markets.
US dollar and its effects – In the current scenario the US dollar is appreciating for two reasons; one is the Federal Reserve’s actions related to raising interest rates and their commitment to bring inflation under control at any cost.
Second is the global economic turmoil results in US being seen as a safe haven which again causes global money to land up in the US, thereby creating demand for the US dollar. But one needs to see the current scenario as a transition.
The US is raising interest rates ultimately to cool the economy and monetary policy cannot be calibrated like the regulator of a ceiling fan. The focus to rein in inflation at any cost is widely expected to cause a recession in the USA. Ultimately the US dollar will reflect their economic reality i.e. a slowing economy and possibly even a recession which will cause eventual movement out from the US in search for growth.
Ultimately the Indian Rupee will reflect our reality i.e. strong growth prospects and rising importance to global growth. Further any de-escalation in Europe will reduce global risk perception and again a movement away from US dollar into emerging markets like India. Net-net one needs to keep patience and look through the next 6-9 months and eventually one will find the US dollar depreciating and the Indian Rupee bouncing back.
It is useful to see how the dollar-rupee equation moved during the global financial crisis in 2008-09. Before the crisis the INR was 42 to a USD, during the crisis it was 48 to a USD and ultimately in 2009 when US went into recession and global risk perception subsided while Indian economy continued its trajectory we saw INR 39 to a USD.
Economic ground realities will catch up – Lastly on the impact of a US recession it is worth noting that in the long run our stock market delivers what our corporates and our economic performance delivers and their stock market delivers what their corporate sector and economy delivers. As a result, in the long term our stock markets are not fully correlated to theirs.
But in the event of any negative developments or any panic in the short term, the global stock market becomes one stock market and any big fall in their market results in a fall in our markets. It takes time for the dust to settle and for our economic resilience to shine through because the normal trajectory resumes.
Whether it is a low scoring match on a dust bowl turning wicket or a bouncy green top, the ultimate advice is if you stay on the pitch, don’t lose wickets and bat your full quota, you eventually win.
– Aashish Somaiya, CEO, Whiteoak AMC