India’s longstanding status as the world’s fastest growing economy may be in jeopardy.
Weak domestic consumption, coupled with a potentially aggressive withdrawal of easy money from the US and Europe, could be the trigger for this change.
Last weekend, the chairman of the US Federal Reserve. Jerome Powell warned of “some pain for households and businesses” in their efforts to curb inflation. An “unusually large” rate hike was planned for September, she said. “We must continue like this until the job is done.”
The probability of an increase of 300-325 basis points (bps) rose to 71.5% today (Aug 29), down from 55% a week ago, according to the CME FedWatch tool.
All of this seems to have spooked US equities and then emerging markets. India’s benchmark stock indices Nifty50 and Sensex were trading down almost 1.5% each today, with the Sensex losing more than 1,000 points in early trade.
The largest MSCI index of Asia-Pacific stocks, of which India is a part, fell 2.3% after Powell’s speech. The index posted its biggest drop since June 13.
Indian markets will remain volatile
Market pundits believe that aggressive gains in developed economies would hurt Indian stock returns, while also curbing foreign interest in its shares.
“The sharp rise in the dollar index above 109 and the rise in the 10-year bond yield to 3.1% are negative for capital flows to emerging markets. [emerging markets] as India FPI [foreign portfolio investors] they are unlikely to continue buying India in this scenario,” said VK Vijaykumar, chief investment strategist at Geojit Financial Services.
The rupee today slipped to a record low 80.11 per dollar and is expected to fall further to 81-82 per dollar in the coming days.
India’s problems, however, do not end here.
India needs to shift focus to consumption
In recent years, its economic recovery has been investment drivenespecially since the covid-19 pandemic.
A consumption-led growth model was crucial as it reinvigorated social security schemes. Meanwhile, most economists have kept their GDP estimates for the quarter ended June below the 16.2% projected by the Reserve Bank of India.
While the economy is expected to grow due to a low base effect and a collection in the service sectorthe rate can be halved between July and September, a Reuters poll of economists has said. Growth may sizzle further toward the end of the year as interest rates rise, she showed.
“By supporting growth through investment, the government has only started an engine and has forgotten the impulse that domestic consumption gives. This is why India’s growth is still below its pre-pandemic trend,” said Kunal Kundu, Indian economist at Societe Generale. NDTV.
India has been struggling with high unemployment and record real wages, which also dim its prospects.