India's market capitalisation has dipped below $3 trillion for the first time in nine months, primarily due to persistent selling pressure caused by the instability of banks in the US and Europe. Deutsche Bank has further intensified worries regarding the well-being of the European banking industry.

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India's market capitalisation currently stands at $2.99 trillion, a level last seen on 23 June 2022. It is currently ranked sixth among the top 10 most valued countries. Since the beginning of this year, it has experienced a decline of almost $300 billion market capitalisation.

In comparison, the United States holds the top spot with a market capitalization of $41.83 trillion, followed by China with $10.67 trillion and Japan with $5.59 trillion. Hong Kong is ranked fourth with a market capitalization of $5.35 trillion, while France holds the fifth position with a market capitalization of $3.06 trillion.

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Last week, central banks including the Federal Reserve and the Bank of England, increased interest rates once again, with their primary focus remaining on inflation. They hold optimistic expectations that the financial upheaval has subsided. Following a 50 basis point hike by the ECB last week, the Fed, Bank of England, and Swiss National Bank increased rates, with the Fed and BoE raising by 25 basis points and the SNB by 50 basis points.

The Fed raised rates last week but did not clarify its future course of action in terms of rate hike strategy and it appears the Fed is unsure how the Silicon Valley Bank crisis may affect the US banking sector. Jennet Yellen's announcement that there were no intentions to secure bank deposits resulted in further unease within the market. Analysts continue to look for one more 25 basis point hike in May and an extended pause before the Fed eases in early 2024.

"We reckon in such rapid tightening cycles, speed can kill, if stress extends beyond the banking system, which could take the policy dynamics to a different scale. We do not see elevated risks of a banking crisis contagion, even though we expect current banking liquidity lines to continue in the near term. Nevertheless, uncertainty remains high and credit conditions ahead are likely to further tighten and materially impact economic activity", said Emkay Research in a note to investors.

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According to Emkay Research, the considerable disparity in actions and perceptions between the global equities and rates markets is concerning to analysts. Equities appear to remain detached from fundamentals, perhaps relying on lower real yields and a growing Fed balance sheet. Emkay says it continues to observe the possibility of difficult sacrifice ratios and financial weaknesses, indicating a mispricing of equities.

Meanwhile, the Indian government's move to hike the securities transaction tax on selling options at the end of the week further dented market sentiments. Indian markets are already under pressure amid expectations of further higher inflation due to unseasonal rains. Investors also worry about the possibility of El Nino which is likely to cut in earnings, analysts expect. The IT sector is already facing job cuts indicating slower earnings ahead.

According to Christopher Wood, the global head of equity strategy at Jefferies said recently that if 2022 witnessed multiple contractions in US equities due to monetary tightening, 2023 is likely to bring about earnings downgrades in the stock market if the predicted US recession occurs. This issue has now become the primary concern in global financial markets, as highlighted in his recent Greed & Fear note. Conversely, the year 2024 may see markets grappling with emerging credit issues in the private sector.

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Wood said the likelihood of a 25-basis point rate hike announcement by the Fed is directly proportional to the restoration of calm in the aftermath of the panic selling of bank stocks in recent days. If the risk-off sentiment persists, a pause in rate hikes appears to be much more probable. Wood noted that, compared to China, India presented a much more uncomplicated long-term investment opportunity. This is why 39 percent of the brokerage's Asia ex-Japan long-only portfolio, which prioritizes long-term investment, was invested in India, while only 25 percent was invested in China. However, this does not necessarily indicate that China is not worth investing in.

Year to date, India's main stock market indices, Sensex and Nifty, have experienced a decline of 5.45 percent and 6.41 percent, respectively. The wider markets, BSE MidCap and SmallCap, have also seen a fall of 6.64 percent and 7.47 percent, respectively. During this time, foreign investors have been net sellers, having sold off over $3.34 billion in local equities. In contrast, domestic institutional investors have been actively purchasing Indian equities, having bought over Rs 75,305 crore worth.

"The volatility in the market is expected to continue in the short term as the global banking system is yet to fully recover from the crisis, especially in Europe. In addition to the banking sector, IT stocks also witnessed selling on fears of muted deal wins from the BFSI segment in the western markets", said Vinod Nair, Head of Research at Geojit Financial Services.

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First Published:Mar 27, 2023 11:29 AM IST