Investors in the Indian equity markets are digesting several adverse developments. The calendar year began with concerns of a possible global recession, which was expected to be triggered by global central banks raising interest rates to tame inflation. This was followed by the collapse of Silicon Valley Bank (SVB) in the US last month. In addition, the crisis in Europe’s Credit Suisse group caused panic in financial markets.
However, a look at the recent movement of the fear gauge Nifty Volatility Index (VIX) points towards some calm, at least for now. So far this calendar year, the Nifty VIX has declined by about 21 per cent. It closed at 11.80 on Thursday, which is lower than January’s closing level of 19.39.
According to analysts at ICICI Securities Ltd, fear of the unknown in global capital markets rose sharply in March, but is now starting to subside. “Fears escalated last month (Mar’23) as indicated by the VIX index following the fallout of the banking crisis triggered by the bank run in the US (SVB and Signature) and the state-backed merger of CSFB (Credit Suisse) with UBS ” it said in a report on 5 April.
“However, the banking crisis in the US has strengthened the big banks as they see a significant increase in incremental deposits coming in from smaller banks. Efforts by central banks and governments have resulted in helping stabilize the banking system in the US and Europe.” The ICICI report said that the fear of the unknown is reflected in the fall in the VIX index.
But that doesn’t mean everything is hunky-dory for equity markets, so the scope for complacency may be limited. Interest rate decisions by the US Federal Reserve, volatility in global oil prices and economic growth trends in the US and Europe, which are likely to remain weak this year, could unnerve investors.
Although the Indian economy is seen to be in a better position than some Asian counterparts, the downside risk cannot be ignored. If El Nino occurs this year, it could affect the country’s agricultural production, which could have an impact on food inflation and rural income. The latter would be a disincentive, especially for consumer companies that have exposure to rural areas.
To be sure, the Reserve Bank of India’s latest decision to keep the key lending repo rate unchanged is a relief to investors, given the widespread expectations of a rate hike. However, the central bank’s fight against inflation is far from over, so the central bank’s next move is crucial.
That said, before the next policy meeting, corporate earnings for the March quarter (Q4FY23) will be published, with IT giant Tata Consultancy Services Ltd announcing results on April 12.
In addition to the headline numbers, focus will be on management commentary on the demand outlook, especially for export-oriented sectors.
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