The slow growth chakravyu

The carnage on the stock markets across the world, including India, has been a work in progress even before China devalued her currency, the yuan, to the dollar in August 11 by nearly two per cent, and weakened further to 6.39 to the dollar by August 14. Monday’s market collapse saw the Sensex crash 1,624 points, the highest ever in the history of the Sensex, and second highest if one counts the intra-day crash on January 21, 2008 when it crashed 2,062 points. Some markets, like Shanghai, fell more than India.

The fears percolated the global markets by late Friday, when the US Dow Jones crashed over 300 points on fears that China would devalue the yuan further. The fact is that the world economies are in a quandary over how to get out of the slow growth chakravyu. Neither China, the US, Europe or Japan have been able to pump up GDP despite trillions of dollars down the drain through growth stimulus programmes. The nearly $3 trillion pumped in by the US alone only succeeded in financing $2.7 trillion worth of stock buy-back.

Nothing seems to work in these free market economies. They all have very low interest rates compared to India, but consumption is moving at a snail’s pace. Incidentally, RBI governor Raghuram Rajan has been so right in refusing to cave in to pressure from India Inc. and finance minister Arun Jaitley, so far, to reduce interest rates as he has always maintained that high interest rates are not the only factor holding up growth. He tried to talk up the markets on Monday, saying India was one of the best placed in the world to weather the crisis as it has strong reserves and several positives.

The Sensex saw its biggest fall on Monday since January 21, 2008 when it crashed 2,062 points intra-day. Monday’s fall is harsher as it was aggravated by the coming settlement day in the derivatives segment on Thursday. Whilst global factors cannot be ignored, India had this added liability. A section of the market says it could be the highest rollover of Nifty stocks to September (1.20 lakh crore) at Rs 3.35 lakh crore for August.

It is strange that Mr Jaitley has been ignoring the regular havoc being caused in the Indian markets by cash settlement instead of physical settlement in shares, as is done in many global markets. Either Mr Jaitley is being misled by vested interests or he is unaware of it, though we have brought it up several times. Every cloud has a silver lining. While the bulls are being mauled it is a good time to enter the markets.