Market mayhem: China too big to ignore

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Bikky Khosla | 25 Aug, 2015
The yuan woes have now spread like wildfire. The impact of the recent surprise move by China to cheapen its currency spilled across the world markets. The last week was a total disaster for investors across the globe and the crisis seems to be deepening daily. The Indian stock markets are pounded too, with the BSE benchmark Sensex last week shedding all its gains of 2015 and shrinking further by a whopping 1624 points on Monday. Amid this gloom, pessimism is also rearing its head - are we on the verge of a bigger crisis?

The yuan devaluation, a move which has raised question about Chinese policy makers' command over the country's plans for economic reforms, brings back the memories of the Asian financial crisis in 1996, although it seems the situation now, despite some parallels, is much better, particularly considering the fact that Asian economies are currently at a stronger fiscal position. However, there is not much scope for complacency. If China fails to lessen its crisis and convince the world that it has a grip on the situation, uncertainties in the global markets are unlikely to end.

Markets are eagerly looking for clarity also from the US Federal Reserve. Is it going to raise interest rates? It is widely expected that the yuan devaluation may delay the move, but the US central bank has yet to send any clear message to allay investors' fears. This is a million dollar question also for India as tightening of interest rates could lead to more outflow of capital from the country, pulling down the rupee further, which in turn, could inflate our imports. In addition, the cheaper rupee, which settled at 66.65 against the USD on Monday, is unlikely to help our exporters due to the sharp demand slowdown in all major economies.

Meanwhile, our Finance Minister has viewed that Indian stock markets will settle down after the transient impact of external factors is over and added that the Centre and the RBI are watching the situation very closely. In a similar tone, the RBI governor is of the view that India's macroeconomic fundamentals are much better than many others. But till now the global meltdown fears have remained unabated and in this situation urgent multi-pronged steps are necessary to mend the domestic economy and protect it from the potential impact of the China slowdown.