There are times in financial-market rallies where the gains become so spectacular and the euphoria reaches such a pitch that it becomes easy to forget about the risks. Here’s a look at five of the biggest of them — all of which are capable of halting, or at least slowing, the market rally.
India, which imports 80% of its oil, has just begun to reap the benefi ts of cheaper oil prices: a comfortable current account position, moderating infl ation, and better growth prospects. A swift reversal could undo those gains.
US Interest Rates Jump A bigger-than-expected increase in the Fed’s benchmark rate makes Indian government debt less attractive. It also damps the 3.4% carry return to those who borrow in dollars and invest in rupees, the highest this year among Asian currencies. Forex Reserves Prove Insufficient India’s forex reserves pile, though sufficient for nine months of imports, may not be enough to support the currency and meet liabilities. In eight months, the RBI will need to pay back $30 billion borrowed from banks at discounted rates when the rupee was falling in 2013. Before then, the government and commercial lenders also need to repay about $86 billion worth of foreign debt. Also, Indian companies are borrowing more in dollars to take advantage of cheaper overseas funding costs, at the risk of being stuck with higher debt-servicing costs if the rupee weakens.
Remittances Fall Migrant laborers working overseas in oil-producing countries risk losing their jobs as growth slows in those nations, which could translate into lower remittances. India probably got $71 billion in remittances in 2014, the highest among 143 countries tracked by the World Bank. Of that, 37% came from the six Gulf Cooperation Council states. Religious, Border Disputes Besides the ever present risk of conflict with Pakistan, violence among the country’s religious groups is a more likely threat to the market rally. Already the opposition has blocked key economic bills over demands that his party address reports of forced conversions of religious minorities. Further incidents of religious strife could undermine Modi’s efforts to overhaul the economy.
1.None of these are going to materialise. First the crude oil price is not going to going up substantially because of the muted demand from china and EU. Second US can’t and will not raise interest rate substantially again because of the fragile economic growth in major countries including EU, China and Japan. Third about foreign reserve, since inflation is coming down, the propensity to invest in gold has come down which has direct bearing on CAD. So on the contrary FX reserve may go up. Fourthly the first ones to lose job in gulf countries are highly paid western expatriates and not lowly paid Indian. They may hire more Indians instead of Westerners. Last if the opposition continues its senseless obstruction tactics, the govt may call joint session of the parliament and pass the necessary bills.
- These assumptions are not that critical. Oil price will move up in long run. But government is raising taxes now and earning the benefit of low crude price, which can adjust when the price is moving up. Time being the low crude price is helping to reduce CAD. As well as availability of fund as tax from petrol is good even though it is for short term. Job loss in middle east is a fact in long run. But in short term it may not have a serious impact on the expectation of rising oil price in medium term.