Stock Market Fall Post Rexit: It May Not Happen, And Even If It Does, It’s Good For Us

The expected crash in the stock market, widely expected by critics of the Modi government for failing to get Reserve Bank Governor Raghuram Rajan to stay for a second two-year term, didn’t happen yesterday (20 June). Reason: domestic institutions stepped in to buy and the government announced a more liberal foreign domestic investment (FDI) regime, thus enabling a rise in the BSE Sensex by 241 points. Day One of Rexit (Rajan’s impending exit) didn’t pan out as the bears hoped.

But far from fearing a Rexit backlash in the markets, there are good reasons to even welcome it. After all, what are stock markets about if not two-way movements, with bulls and bears dominating in turn. India grows whether stocks are in retreat or in surge. No market can move in one direction all the time.

So whether it is Rexit or Brexit (due on 23 June), stock market corrections are also to be welcomed for some reasons.

One, a Rexit would allow those who missed out on the rally of the last three months, when the Sensex rose 15-17 percent, to enter the market.

Two, the long-term trend of the market should be in line with that of growth. If growth is around 6-8 percent annually, stocks should grow twice as fast, as share prices are expressed in current terms. So Rexit or no Rexit, stocks should go up.

Three, if Rajan’s successor takes a different line on interest rates (ie, he/she is less hawkish on inflation), it will boost stocks anyway, for stocks and rates are inversely related. Also, lower rates are positive for almost the whole of India Inc, including the banks. Another reason for a market boost.

Four, the main reason why Rexit is seen as negative is Rajan’s cult-hero status among foreign investors. But investors are not driven purely by reputation or aura. They were eating out of Alan Greenspan’s hands for a decade, but after 2008, where is Greenspan’s reputation? If Rajan’s replacement is a competent economist, investors will look at what he does, and not at his star quotient. The India story has not changed despite a change in RBI Governors.

Five, just as Rajan argues that a slowdown is good for inflation, we should admit that if FIIs have a smaller share of our market it would be more stable. Their presence would be balanced by our own domestic institutional and pension fund investments. Our priority should be to increase the domestic share of stock market capitalisation, not depend forever on FIIs. Some swadeshi thinking is needed here at least.

Rexit, if it happens, is not such a bad thing. In any case, there is no reason to fear it like the plague. Even if it comes, it won’t last. India is still one of the few best games in town for FIIs and domestic investors.