Last week, India's globally tracked stock market index, S&P BSE Sensex registered a loss 2.8% (802.26 points). This might look quite ordinary considering the valuations we are trading at. However, out of this uncommon fall, we witnessed the downward movement of 465 points, within a nanosecond of India formally announcing the surgical strikes in Pak Occupied Kashmir (PoK). Out of India's top 10 most valued companies, 9 collectively lost Rs 57,065 crore worth market capitalisation last week, as reported by the Economic Times dated October 02, 2016. In other words, half the decline happened as soon as markets feared a further escalation of the situation and investors withdrew funds from India's most valued companies.
Why aren't Indo-Pak tensions shaking markets now?
As the Government of India has taken a tough stand against Pakistan, exploring all alternatives to isolating it on the global landscape, Pakistan has gone into face-saving mode. On the other hand, India has shown its agility and preparedness for adversities by keeping troops ready and evacuating people from the villages located near borders. It is no wonder then that markets started the following week on a positive note with indices faring in green. This happened even when the terrorists opened fire on the Indian Army base in Kashmir, and Indian Army retaliated strongly. Since, Pakistan is still operating through proxies, the fear of full-fledged war breaking out has receded. Even the reports of China, a close ally of Pakistan, blocking the flow of a tributary of the Brahmaputra in Tibet haven't affected the market sentiment.
At the time of writing this article, an advance decline ratio of the companies traded on BSE stood healthy at 4:1 i.e. for every 4 stocks advancing there was only 1 stock declining. All these indicators suggest that equity markets have probably looked past the heavy fall of last week. As long as tensions between India and Pakistan do not show adverse economic implication on India's prospects or relations between India and China do not deteriorate, markets are unlikely to see any major commotion.
Eyes on the monetary policy review...
Interestingly, capital markets are going into the fourth bi-monthly monetary policy review with a positive view on interest rate cuts. However, experts and economists stand divided. A few believe that unless RBI sees the inflation further decline in the coming months, it's unlikely to lower policy rates. Also, a few economists believe that any geopolitical tension between India and Pakistan can be inflationary for the nation, and thus, RBI may like to see a clear trend on this front as well. PersonalFN is of the view that, the Monetary Policy Committee (MPC) may maintain status quo at the forthcoming review meeting.
Improving the current account conditions and adequate foreign exchange reserves keep the Indian Rupee strong. The stable currency might help India negate the potential rise in crude oil prices following the recent announcement of the Organization of the Petroleum Exporting Countries (OPEC) to cut down oil production. So far, the crude oil prices haven't shown any significant upsurge. As far as the performance of our Indian economy is concerned, factors such as good monsoon and the implementation of 7th pay commission are likely to provide the impetus to consumption—a key to pushing India's economic growth higher.
You might realise that a knee-jerk reaction to a geopolitical adversity might prove to be momentary and once the picture becomes clearer, the markets can quickly recover lost ground. This is why PersonalFN believes investors shouldn't press the panic button even when the market sentiment is negative. The smart way is to invest as per an asset allocation plan that considers your financial goals and risk appetite.
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