In charts: Can India really decouple from the global slowdown?.

Even though Indian equity markets have fared better than the US and European markets for the last several months, the belief that the Indian economy may have detached from world markets amid a global recession may not necessarily be true.
While the NSE Nifty has been relatively flat this year, the S&P 500 is down 19 percent, Nikkei 6 percent, FTSE 4 percent, DAX 20 percent, and Hang Seng 19 percent.
According to Dr Soumya Kanti Ghosh, group chief economic adviser of SBI, the fear of recession in India is unfounded aven as world economies seem to be heading in that direction. In a report published last week, he said “Amongst so many indicators, the performance of equity markets also substantiates this fact. While the foreign equity markets’ year-to-date (YTD) decline in 2022 is in the range of 20%-30%, in the case of India, the decline is merely 3.5%. Not even Indian markets are the lowest loss generators; they are stable also. Hence, in 2022 so far, Indian equities have shown resilience relative to most of the advanced economies and peers from the emerging market economies (EME).”
In another research report, brokerage Motilal Oswal said India is shining amidst a challenging backdrop.
“India has emerged as a shining star in CY22 (calendar year 2022) with healthy outperformance amid varied global headwinds on macros, inflation, rates, currency and geopolitics,” Motilal Oswal said.
While most global equity markets are down 20-25 per cent India is flat and steady (in local currency) driven by several key factors such as: a) strong corporate earnings growth over the last two years and expectations of a healthy performance over FY22-24; b) resilient domestic equities inflow and c) deft macroeconomic management by the Reserve Bank of India (RBI) and the government that has helped India stand out in an otherwise volatile and panic-stricken world, Motilal Oswal said.
However, Kotak Securities doesn’t share the same enthusiasm as India’s economic recovery has been somewhat subpar so far and twin deficits are well above comfort levels even without factoring in any potential energy price shock.
“We note that markets may decouple in the short term (for whatever reasons) but economic linkages will inevitably result in some ‘relationship’ between markets too. The Indian economy is too interlinked with the global economy for economic or market decoupling in reality,” wrote a team of analysts at Kotak led by Sanjeev Prasad last month.
More than domestic factors, India faces headwinds from imminent global trade slowdown, risks of longer global inflation/ rates, dollar strengthening, and enduring geopolitical tensions, according to another macroeconomic report by Kotak Institutional Securities that was published on 7 October. And the global slowdown will likely have severe repercussions for India’s balance of payments, which is already challenged by lower exports and lower capital inflows.
Global slowdowns typically transmit through trade, commodity prices, capital flows, and financial sector channels. As global demand slows down, India is unlikely to be immune with the trade and capital channel being the key risks and determinants of India’s growth, says Upasna Bhardwaj, economist at Kotak Institutional Equities.


India is not a major global exporter (around 2.2% of world exports) and even in terms of contribution to GDP, it remains relatively low compared to other countries (see Exhibit 3). However, the trade channel will impact India to some extent

India is not a major global exporter but the US and the EU-5 together account for around 30% of India’s total exports. Also, a large part of the global exports is dependent on the US and Europe, which in turn will have an indirect impact on India too. Kotak’s analysis indicates that a fraction of US$150-160 bn of goods exports could be at risk from both direct and indirect impact of slowdown in US and EU.
Not all sectors see an equal impact due to recession. Since the pandemic, there has been a sharp increases in the export value of gems and jewelry, textiles, metal products, mobile phones, etc. buoyed by the robust global demand while sectors such as auto and ancillaries have been negatively impacated.
However, lower exports coupled with a relatively strong domestic growth (hence higher imports) could risk worsening the external balance for India. Exports have helped push India’s GDP back to pre-pandemic levels, and while India can benefit from recession-led fall in commodity prices, higher energy prices due to the Russia-Ukraine war may negate much of India’s benefits from a global slowdown, says Upasna Bhardwaj, economist at Kotak Institutional Equities.

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“Domestic inflation should benefit from the softening of global commodity prices. We note that energy prices for consumers have seen relatively muted increase given that prices for automobile and household fuels have been capped with governments/OMCs bearing the cost. Assuming that fuel prices remain in check, we estimate inflation to average 6.6% in FY2023E. In FY2024E, if crude prices average around US$90/bbl, average inflation is likely at 5.1% with the trajectory inching higher as base effects wane through latter part of FY2024. However, energy prices trajectory remains uncertain, especially as crude oil and natural gas will remain linked to geopolitical tensions beyond the slowdown fears,” said Suvodeep Rakshit, economist at Kotak Institutional Equities.
The net impact of commodity price will show up in India’s current account/ Balance of Payments too. Even without the impact of recession-led export slowdown, metals imports, which had increased at a CAGR of 16.3% over FY2020 levels, will likely contract as the price effect wanes, noted the report.
At the same time, if energy prices climb back up, much of the gains of lower prices will be eroded with a wide trade deficit.
Capital flows: Even though India will be a relatively favored destination for foreign portfolio flows, especially in comparison to export-oriented economies, Kotak noted that central banks globally will aim to contract their balance sheets in calendar year 2023, which will be a drag on global liquidity along with higher rates.
“Historically, central banks have responded quickly to recessions thereby capping risks of substantial capital outflows from EMs. In the US, historically, rate cuts have either immediately preceded or followed recessions. However, if inflation were to stay elevated in CY2023, the Fed may not readily embark on a rate-cut cycle,” said the report.

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In the near term, the extent of Indian rupee depreciation and RBI’s response through rates and foreign exchang reserves will be watched. Over the medium term, markets will evaluate the extent of growth recovery, success in capping inflation pressures, and managing twin deficits, Kotak Securities added.
Moreover, the global macro environment has changed with the return of inflation. Failure to ignite inflation with more than a decade of ultra-loose monetary policy has shifted to central banks struggling to get inflation under control.
Contrary to the past decade, the next few years could be marked by higher-than-usual global inflation/interest rates driven by (1) shifting to fiscal policy for driving growth, (2) relatively muted growth and disinflationary impulses from China, and (3) continuing (and possibly growing) geopolitical challenges.
India’s relative attractiveness over the medium to long term, among other factors, will depend on (1) the manufacturing sector becoming key driver of growth and private sector investment cycle revival driven by manufacturing sector growth.
Near-term policies should be geared towards reducing fiscal deficit while improving on public infrastructure spending, reverting to neutral liquidity and positive real rates, and ensuring trade openness, Kotak Securities said.

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