Current State of Indian Markets and Historical Context
Since October 2024, Indian markets have experienced a correction phase:
- The exchange rate has depreciated by 4%.
- Reserves have decreased by $65 billion, constituting 9% of the stock.
- Foreign Institutional Investors (FIIs) have withdrawn nearly $23 billion from equity and debt markets.
Historical Episodes of Market Sell-Offs
These market corrections are not unique to India and have occurred frequently over the past decade:
- 2013: Initiated by the US Federal Reserve's announcement to reverse its monetary policy, leading to the "taper tantrum."
- 2016: Triggered by the election of Donald Trump as US President.
- 2018: Due to escalating US-China trade tariffs and tensions.
- 2020: Onset of the COVID-19 pandemic.
- 2022: Outbreak of the Ukraine-Russia war.
- 2024: Fed's policy rate adjustments and Trump's trade policies.
Impact on India
India has been one of the most affected economies during these sell-offs:
- 2013: Exchange rate depreciated by 25%, reserves declined by 6%, equity markets fell by 9%.
- 2018: Exchange rate declined by 15%, reserves fell by 8%, equity markets decreased by 3%.
- 2022: Exchange rate depreciated by 10%, reserves dropped by 16%, equity markets fell by 13%.
Characteristics and Resilience
These episodes are characterized by:
- Short-lived impacts, usually lasting a few months.
- Not causing major economic slowdowns due to robust policy frameworks.
- Resilience of domestic financial sectors.
Response Strategies
- Countries leverage exchange rate flexibility, forex reserves, and credible monetary policies.
- No drastic measures, such as IMF assistance, are typically necessary.
Future Preparedness for India
Ex Ante Measures
- Encourage stable, long-term capital inflows (e.g., FDI).
- Rebuild reserves buffer when conditions allow.
- Allow exchange rate movements to prevent excessive volatility.
Ex Post Measures
- Calibrate exchange rate depreciation and use reserves judiciously.
- Reassert commitment to reforms and macroeconomic stability.
- Avoid policy missteps, such as new capital controls.
- Communicate clearly with market participants.
- Consider renewing swap lines with specific countries and schemes for diaspora funding.
In summary, as a large emerging market, India must remain vigilant, prudent, and committed to reforms and growth to mitigate the impact of such economic shocks.