What Caused the Massive Market Crash Today

Published: January 06, 2015 18:57 IST
(M.K. Venu is Executive Editor of Amar Ujala publications group)

India's share market saw the biggest single day sell-off in over a year as bellwether stocks uniformly got mauled against the backdrop of global oil prices potentially falling further to levels below $50 a barrel. Oil prices seem to  be falling to levels not healthy for any economy. 

The bench mark BSE index lost 900 points during the day as stock values fell across the board. The magnitude of the fall has caused a major scare among those who have been generally bullish about the Indian markets in recent months, especially after Modi took over as Prime Minister.  Indian stocks were scaling newer highs in anticipation of a reform-oriented budget at the end  of February.

However, some key global factors, which seem to be worsening by the day, may threaten the evolving India story in 2015. For one, market analysts in the West are now talking about a "deflationary mindset" developing because of the precipitous fall in oil prices from $105 a barrel in June, just after the NDA came to power.
Initially, it was assumed that the drop in oil prices would help net oil importing nations like India and China. Indeed, India's economic prospects did get bolstered as global oil prices fell to about $ 70 per barrel. But the price fall continued and is now making the global market players very nervous. The stock market response on Tuesday in India and the rest of the world reflects this.
FIIs drive the Indian market and they seem worried about the nature of the unceasing decline in world crude prices. The FIIs may be tempted to shift some of their funds to safer havens like the US treasury. This is not good news for India which is planning big PSU divestments, partially to fix its fiscal deficit. Divestment is generally avoided in such choppy markets. Mind you, the continuously falling oil price is at the root of volatility in stocks, currency and government bonds. Russia is a prime example of an oil exporting country going down the tube. The point is the world cannot really be a net gainer if big oil exporting economies like Russia, Brazil and Middle East suffer huge wealth destruction. After all, they are also big investors around the world.

Therefore, if the most traded global commodity, which can have a profound impact on the value of every other asset class, collapses by over 50% in just five months, it presents a very worrisome prospect. The worry is compounded when this is accompanied by fears of some EU nations like Greece slipping into a deeper recession and a giant economy like China, contributing to 30% of global GDP, decelerating further. China was primarily responsible for the higher oil demand in recent years, but its oil import growth was near negative in 2014 and may continue to be so in 2015.

India must be acutely mindful of this and our policy- makers must abandon the earlier narrative that  the oil price fall will decisively benefit India. They must start working on Plan B which takes into account the negative impact on India of greater volatility in global finance capital movement caused by short-term fears of a big deflation in the oil market. The stock market crash on Tuesday is but a small reminder of how we cannot benefit if there is economic mayhem occurring in most oil exporting economies. Don't forget the Middle Eastern sovereign wealth funds have been big investors in India.
Finance Minister Arun Jaitley has understood the risks involved in the event of precipitous fall in oil prices and its impact on the government balance sheet and the markets. At his New Year lunch, he did mention to journalists that oil price fall affects both sides of the government balance sheet. It reduces oil subsidy, but it also reduces oil revenues at the Central and state level. No wonder he has raised excise duty on oil three times so far. The larger point is India does benefit from a fall in oil prices but it would suffer, along with others, if there is a collapse in the oil market of a kind which destroys massive global wealth. This will surely have a ripple effect in other markets too. The Indian currency could also get impacted in a volatile phase in the world markets.

The RBI may have supported the rupee by selling dollars on Tuesday. If the current volatility in oil prices continues, the rupee's value could cross Narendra Modi's age by budget time. Remember, just a year ago, Modi used to talk about the rupee's exchange rate touching Manmohan Singh's age!

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