The BSE Sensex rallied 517 points on Thursday, posting its second-biggest gain this year. The rally partially erased the 1,525-point deficit the Sensex suffered on Monday.
The roller-coaster ride in domestic stock markets has been linked to developments in China, where the central bank announced a surprise devaluation of its currency yuan on August 11. Most emerging market currencies, including the rupee, lost value following yuan’s devaluation.
China’s manufacturing data, released last week, further dampened sentiments, triggering a collapse across global markets.
“China comprises 15 per cent to global output but contributes about half of the global growth, so the slump in manufacturing in August to more than 6-year low sent jitters across the globe,” wrote Dr. Soumya Kanti Ghosh, chief economic advisor of State Bank of India.
A six-day selloff in China, erased over $1 trillion of investor wealth, and several dollars in market cap was shaved off across countries this week. Economists are apprehensive that further devaluation in the yuan may lead to currency wars. But Dr Ghosh says the devaluation in the yuan will prove to be a blessing in disguise. The weaker yuan would help make China’s exports more competitive, which would likely help boost the nation’s economy and eventually prompt a recovery in economies from where China imports, he added.
“The 30 per cent appreciation (yuan) accumulated over the past five years may have chipped away 2.5 per cent from China’s growth rate. This reduction in China’s growth has translated into a drop of GDP growth in poor countries,” Dr Ghosh said.
He also expects India to ride through the crisis and emerge stronger. According to Dr Ghosh, equity premium and the comfortable foreign reserves ($354 billion as on August 14) show that domestic macro fundamentals are still in a significantly better shape than they were previously.
The current crash is driven by external factors, so markets will recover based on upcoming macro numbers which will be positive, he said. June quarter GDP and CPI inflation in August will likely be a big positive surprise, Dr Ghosh added.