Chief Economist at the National Stock Exchange of India
The COVID pandemic seem to be back where it began, and in force, following China’s rapid opening up after extended lockdowns. Far from writing an epitaph of the pandemic, we are masking up. Even accounting for the pandemic years 2020 and 2021, this has been a year of pivots. Many of the prisms with which we see the world need to be changed.
We began 2022 expecting domestic levers to help as the global economy turned less conducive, little realizing the titanic nature of the shift in the environment facing us, a geopolitical Zeitenwende. While countries tried to realign their strategic choices, Russia’s invasion of Ukraine raised food and fuel prices globally, exposing vulnerable countries (some of which collapsed, like Sri Lanka) and forced central banks left with low rates and expanded balance sheets in the wake of the pandemic to factor in an unprecedented rise in inflation. The Fed raised rates in February when it found inflation to be anything but transitory. The resultant hike in rates saw the worst first half in 50 years for global equities. Some countries like India bucked the trend, partly due to new trends in household participation in markets since the pandemic. Demat accounts across the two depositories now total over 106m, a far cry from 50m in Dec 2020, even as the incremental figures are tapering off now.
The Fed action on cooling down the red-hot US economy (Quarterly GDP growth @7% in Jan 2022, inflation 9.1% in June’22) meant a recession with peak rates construed as levels that led to one. Expectations of a Fed ‘pivot’ in June buoyed markets, until higher inflation prints brought them back to terra firma. In the UK, the government briefly floated above it with its tax proposals, before market realities set in. On Climate change, it was a Zeitenwende too, as the COP27 for the first time agreed to a Loss and Damage Fund to countries most vulnerable to climate change. Such cooperation is needed across countries in the post-pandemic, new global order world rising rates and a global slowdown could lead to multiple defaults. India’s current presidency of the G20 could be an ideal platform to drive a supportive and inclusive agenda.
Expectations on peak rates remain high towards the year-end, even though inflation remains high (7.1% in November in the US) as well. US markets remain ~19% down YTD, while the Indian markets are up ~5%. Not just equities, 2022 has been hard on global bonds as well, the rise in rates drew the curtains on a multi-decade bull market. As we have written earlier, inflation remains front and center for the global economy, going into 2023. More in our market and macro sections in the report.
Domestic resilience now matters to an India in a slowing global economy. While the struggle with inflation is indeed ‘far from over’, there are a few silver linings in an otherwise cloudy firmament. The banking system is out of the assetquality cycle, with balance sheets well-capitalised and in a position to provide for corporate balance sheets with reasonable leverage. Fiscally, tax collections have picked up in a meaningful manner, allowing scope for support next year as higher cost of funds hit a nascent demand recovery. Household savings diversification across asset classes places them in a better position to face an era of shifting return profiles.
Our November/December double bill contains multiple interesting research papers. We have a total of nine papers in this edition, adding up to a total of 49 papers this year across engagements with partners ISB, IIM-A and NYU, and the interest of brevity we would refrain from individual mention. The tenth instalment of our annual NSE-NYU Conference is now scheduled for March 2023. Kindly see the Insights section for more on this.
As we write this note, the war is Ukraine continues, although in a direction not foreseen in February. The pandemic seems to have returned in force to where it began. The Fed is not done with rate hikes, and the likelihood of a US recession is greater than ever. Governor Kuroda’s surprise pivot this week has meant the BoJ is now in line with major central banks. The IMF’s forecast for CY23 at 2.7% could see further downgrades for most geographic regions. For the Indian economy, inflationary conditions, rising rates and a resultant growth overhang would be the base case, steering out of which would require all hands on deck. One hopes the pandemic stays in China, but previous experience from its spread in an interconnected world has been different.