The recent meltdown faced by the Chinese economy caused a ripple effect across the globe with market volatility hitting a new high. The impact on the rest of the world is hardly surprising given the fact that China contributes almost 14% to the world gross domestic product (GDP) and 50% to the world GDP growth.
But surprisingly, India has successfully managed to minimise inflation during these turbulent times and is finally inching towards a favourable growth trend. As the economy starts opening up, sectors like private banking and automobiles will have plenty of reasons to smile.
The Root of the Problem
The fear of market volatility has been haunting potential investors and subsequently causing a drop in market growth. Why exactly is the market in such a state of panic? Well, a couple of disconcerting elements have fallen together and pose a risk of fall in the value of investments like stocks, bonds and foreign currency. Here’s a breakdown of these causes:
- Weak Chinese Economy- Undeniably, the biggest contributor to the current market condition is the poor state of the Chinese economy. The fall in demand for commodities from China led to a decline in the prices of the commodities. This made a greatly impacted the country’s economy and instilled doubts in the mind of investors about global growth and flight of capital.
- US Federal Interest Rate Hike- Another reason for the recent market volatility is the anticipated hike in the interest rate by the US Federal Reserve. The actual impact of the hike can only be gauged when the rate is announced, but the mere expectation of an increase in the interest rate in the world’s largest economy, after a decade, has caused a frenzy amongst investors.
- Foreign Institutional Investors- FIIs also have a part to play in the current condition of the Indian market. The FIIs have been constantly selling their investments due to pressure from global emerging market funds and this has caused a strain in the market.
What it means for the future
While the Indian economy hasn’t been too badly affected by the turbulent times, the market did take a hit due to the speculative nature of the issues at hand. While the earnings will remain subdued across the different sectors of the market, there are some segments like banking that will experience positive growth.
Also, with the ongoing Bihar elections coming to a close soon, the changes in the political landscape of the country will surely affect the overall functioning of the market. The Reserve Bank of India’s move to front load the interest rate cut will work in the favour of investors and give them more reason to invest.
The market volatility is well past its prime stage and the effects that remain will slowly fade away over the next few months.