In economics, it is extremely common to fall into the fallacy of attributing causality to correlation. Often events may occur seemingly in tandem, but in reality may be disparate processes just coming to a head at the same time. Such events have just occurred in the Indian market from late last week to date. Though the Finance Minister’s inaugural budget, unveiled On July 5th, could be faulted for not bringing urgently needed tax relief, it certainly was a budget with great positives. Most importantly, it put the development of bond markets back on centre stage, which has been a crying macroeconomic need for the longest time, and by so doing, firmly brought the growth impetus right back into the budgetary discourse.
This ties in directly with our developing our derivative market offerings, which Governor Das has called for almost a quarter ago, and smoothing financing terms for the next major economic expansion. Logically, this should have been applauded by the market. How is it that the immediate ‘response’ was a devastating tank of 800 points in the Bank Nifty, and a downward drift in the Nifty on Monday and Tuesday? The answer lies in the fact that this was not a response to the budget at all but to tectonic shocks in the banking and NBFC sectors that are facing unprecedented crisis, and coincidentally, at almost the same instant, among other factors, some of which we outline below.
As June ended and the pre-budget session in the market loomed, news of the Sterling Biotech event dominated the wires. The market saw a Rs. 14,500 crore problem hitting Indian banks, with Rs. 9,000 crores of it being overseas. Comparison with the Nirav Modi case was inevitable, which was significantly smaller, at Rs. 13,700 crores.
Now fast forward a week later to Saturday, July 5th, the day after the budget. As the market was still reflecting on the proposals, along came news from the formerly beleaguered Punjab National Bank that yet another massive fraud, of Rs. 3,800 crores from Bhushan Power and Steel, with the additional threat of contagion to other lenders, as well as to entities acquiring the bankrupt firm.
As the new week began, Punjab National Bank stock naturally dropped, dragging the financial stocks down with it, in a reverse halo effect. So of course we saw the Bank Nifty submerge. But as the new week continued further, there was no cheer from the first results of the season being released. Most significantly, Titan invoked global macroeconomics, especially the rising price of Gold to explain its performance, and the market responded by delivering a 12% fall in Titan’s share value.
Adding to all of this was the U.S. Jobs Report on Monday, indicating that the U.S. economy added 224,000 jobs in June, as against the consensus number of 165,000. This strong showing dashed hopes of a rate cutting Fed, which would have caused capital flight to Asia and Emerging Markets. The impact was a downward movement of about 2% for stock markets across Asia and Emerging Markets. This further hit the Indian equity market.
So all in all the story as our analysis sees it that of disparate events that all happened to have come together at the same moment in time. Let us not mistake these events as being linked to each other but recognize them for being extremely serious, but separate. This week is clearly seeing the impact of disparate events driving the market down in spite of the Budget, not because of it.
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