Market regulators and even governments have very few options when financial markets go into the kind of panic-driven free fall as witnessed on Monday. The shock waves triggered by an over 9 per cent fall in Chinese stocks hit capital and currency markets worldwide. India was no exception to the global sell-off, with the BSE Sensex shedding over 1,624 points — nearly 6 per cent — and the rupee tumbling at one point to Rs.66.60 against the U.S. dollar, its lowest level since 2013. The immediate task for the market regulator, the Securities and Exchange Board of India, will be to put in place measures to ensure that there are no major settlement defaults, which can trigger a systemic collapse. Other than that there is little it can, or indeed should do, to prevent the current re-rating of asset prices in the market running its course. On the currency front, Reserve Bank of India Governor Raghuram Rajan has given out the assurance that the central bank has sufficient foreign currency reserves — around $380 billion — to dampen any major volatility of the rupee. However, it can only flatten the trajectory of any fall, not reverse it. Besides, it needs to keep the powder dry to tackle any further devaluation of the yuan, which China might be forced to do if growth continues to be slow. After all, Monday’s global sell-off was prompted by poor industrial output numbers, only confirming the fears of global investors that China’s ‘managed slowdown’ was proving less manageable than it had let on.
For India, the Chinese collapse might actually provide an opportunity. As Dr. Rajan has pointed out, India has a low current account deficit (CAD), the fiscal deficit is manageable, inflation is moderating and short-term foreign currency liabilities are low. Despite a downward revision by global rating agencies in the growth forecast, growth is still fairly robust compared to other major economies. The fall of the rupee has been largely offset by a slump in crude prices, which should further ease pressure on the CAD. A cheaper rupee will also help revive exports. Progress on key reform measures such as the GST and Land Bills, and a step-up in infrastructure spending, could boost industry. A strategically timed interest rate cut can help revive consumer and investor sentiment. For that to happen, the Centre needs to demonstrate greater political skills in pushing its reforms agenda, and speedier reflexes than it has shown so far. A case in point is the delayed PSU disinvestment programme. Monday’s offer for sale of 10 per cent of shares in Indian Oil Corporation barely scraped through amidst the bloodbath. Future asset sales will have to be in a markedly more bearish market, leading to lower realisations.