Impact of recessionary fears in US on capital flows to India
Nearly all major US stock markets declined around 2% last week on the probable fears of an impending recession. The YTD index returns on NASDAQ and S&P 500 stand at -30% & -17% respectively. In this newsletter we would simplify the concept of recession and the likely impact of recession in the US has on capital flows in India or the world economy in general.
Stock market movements are a signal of how investors perceive the near term economic prospects. Latest inflation figures or a less business friendly comment from a minister may lead to stock market decline. But it is not a macroeconomic indicator to qualify a recession.
Expansion is the opposite of recession. During expansion the economy grows. Recessions are brief and episodic whereas expansion is the natural state of any economy. If we drill down, there is a concept of ‘Recession’ and ‘Technical recession’. Economy is said to be in a technical recession when it contracts consequently for two quarters. The indicator used for measuring the economy is the GDP. Thus, for example, if GDP had contracted by 4% and 3% in the first two quarters of FY23, then the economy is considered to be in a technical recession. The US economy has grown in Jul-Sep 22 quarter thus it would not be considered in technical recession.
But when we use the term recession, it becomes more subjective as different apex national agencies (which collect, analyse, publish official economic statistics) define recession differently. In the US, the National Bureau of Economic Research (NBER) defines recession as
“a significant decline in economic activity that is spread across the economy and lasts more than a few months.” “The committee’s view is that while each of the three criteria—depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another,”
Thus, it is a subjective assessment based on their reading of objective figures. NBER would take into account not only GDP (de)growth but a host of other macroeconomic indicators and hasn’t declared that the US is in a recession as of now.
The present public discussions stem from the fact that a set of lawmakers and business leaders are unconvinced about the US Federal Reserve’s (central bank) continued stand of maintaining high interest rates to curb historically high inflation rate and bring down price levels. Thus, they would argue recession is being induced by the Fed’s actions.
Since, the US is the world’s dominant economic power, irrespective whether recession is declared or not, a slowdown in the US impacts the world economy at large, India being no exception. Hence, investment inflow is likely to reduce. Opening lines of RBI’s December monthly bulletin on state of the economy attest this –
‘The balance of risks is increasingly tilted towards a darkening global outlook and emerging market economies (EMEs) appear to be more vulnerable, even though incoming data suggest that global inflation may have peaked.’
As per the official RBI figures upto Oct 2022, there was net foreign investment outflow of $623 Mn in Sep 22 whereas a net inflow of $3.3 Bn in Oct 22. When compared YTD, net inflow for Apr-Oct 22 stood at $14.8 Bn, around 37% decline from Apr-Oct 21. If we look historically, the last major recession in the US, during the financial crisis of 2008, foreign investments to India declined by over 30% in 2008-09.
It would be interesting to follow the figures in coming months as macroeconomic conditions in the US become less ambiguous and we have a definitive answer on the duration and intensity of the economic slowdown.
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