US Federal Reserve chairman Jerome Jay Powell, in a short, decisive and direct nine-minute address, outlined the probability of future rate hikes, jolting the markets out of their exuberance. The US Fed’s commitment to frontload rate hikes is something that central banks usually follow. It is a policy that the Reserve Bank of India (RBI) has also successfully deployed.
As expected, the market reacted negatively. US stocks tanked in a day what they had gained in a month, while yields on benchmark securities spiked and the dollar moved to their twenty year high, threatening peer currencies and global trade alike.
Amid all this, the equity and currency markets in India, while reacting adversely, quickly recouped some of the losses in subsequent trades.
The portfolio inflows turned positive even though marginal at $30 million as on August 29, 2022. The overall portfolio inflows since July 29, 2022 is now $7.6 billion as against an outflow of $14.7 billion in FY23 prior to July 29, 2022.
“Clearly, India seems to be enjoying the ‘There Is No Alternative’ (TINA) factor, as globally all countries are facing the churn, and India seems to the best placed jurisdiction in terms of growth and inflation outlook in FY23. We share such optimism as China is also facing a bleak outlook on the back of a construction sector meltdown,” the State Bank of India said in its Ecowrap report titled Frontloading Fed Rate Hikes & China’s Worsening Construction Bubble: Is India Enjoying The New ‘Tina’ Moment In A Checkmate World Embracing Plus One?
The report also outlined how the negative population growth in China will impact the economy by slowing down demand in the real estate sector, and India is likely to benefit in terms of new investment intentions.
“The China story may now be facing clear headwinds and India is likely to benefit from such stark realities over the longer term. The trends in prices of both retail and commercial real estate in China now show much deeper structural adjustment. The long-term trends in retail prices show that since 2016, prices have been steadily declining along the linear trend. In 2022, even the nominal price index has witnessed de-growth. The real price index growth has been in negative growth since December 2021. Home sales in China have fallen for 11 months in a row, official data shows. That is the longest slump since China created a private property market in the late 1990s,” the report said.
“Chinese demographers are now predicting that negative population growth in China will be the dominant trend in the coming years for a long time. The housing demand will eventually decline in the long run in China as seen in Japan. The future outlook of the construction sector in China over the long run structural factors such as demographic ageing and rebalancing of economy will eventually remove a substantial portion of demand. India is likely to be the beneficiary as China slows down in terms of new investment intentions,” the report added.
It said that while China has been grappling with a meltdown in construction sector, housing unit sales in India in H1 2022 (Jan-June) have reached the highest level since H12013. Low interest rates and comparatively low home prices along with the renewed need for home ownership sparked by the pandemic, have been the primary drivers for this growth.
They grew by 60 per cent year-on-year, while the number of units (158,705 during H1 2022) was 19 per cent higher than the preceding period of H2 2021 in seven major cities, the report cited.
According to the report, the growing population of India will, however, add to India’s competitive edge over China is terms of a skilled global workforce for the manufacturing sector.
The decision by US tech giant Apple to begin the production of its flagship mobile phone, the iPhone14, from India within a few weeks after its September 7, 2022 launch, is a sign of this optimism in the India growth story in terms of a China+1 policy by most manufacturers on the lookout for a reliable and skilled manufacturing destination outside of China, the report said.
“As the largest democracy of the world seems set to overtake mainland China in terms of population, there are also talks growing about the emergence of a new world order where the global chaebols are reinforcing, in a re-calibrated supply chain management effort, the China+1 model, shifting part of their manufacturing to competitive locations in the vicinity which offer skilled labour set and other enablers at a comparatively sweetened price while having a simplified ‘ease of doing business’ ecosystem, incentivising competitiveness and innovations both seamlessly,” the report said.
“While there are many suitors for the immense opportunities that these ‘stable’ investments from global majors promise in the intended geography, from Taiwan to Vietnam to Philippines to neighbouring Bangladesh, we understand the inherent sweet spots of Indian economy make out a stronger case for majority tilting in favour of the largest democracy of ours,” it added.
“The move by Apple, the most recognisable face of tech infused innovation in the last two centuries, that captures aspirations of an upwardly mobile population should open the flood gates for other major conglomerates to follow suit,” the report further said.
