• UGI USER
  • Aug 06, 2024
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GLOBAL MARKETS PLUNGE ON US RECESSION FEARS

Why in the news?

  • Global markets plunged due to fears of a US recession, yen carry trades, and geopolitical tensions.
  • The rupee hit an all-time low, and foreign portfolio investors withdrew $1.2 billion.
source:scribd

Global Market Impact:

  • Rupee Falls: Hits an all-time low of 84.09 against the dollar due to global sell-off and FPIs pulling out $1.2 billion.
  • Market Declines: Sensex and Nifty fell by 74% and 2.68% respectively; Nikkei and Hang Seng also experienced significant drops.
  • Sell-Off Triggers: Japanese yen surges as investors unwind carry trades; global equities, oil, and high-yield currencies slump.

US Economic Concerns:

  • US Recession Fears: Weak jobs data and poor earnings from tech firms exacerbate recession fears.
  • Wall Street Impact: Major indices like Nasdaq and S&P 500 drop, with Nvidia, Microsoft, and Alphabet suffering significant losses.
  • Economic Data: July jobs report and manufacturing figures contribute to market pessimism.

Domestic Stock Market Reaction:

  • Sensex and Nifty Performance: Both indices tanked nearly 3% on Monday, reflecting the broader global market trends.
  • Increased Volatility: Domestic markets mirror international trends, highlighting global economic vulnerabilities and investor anxiety.
What is a recession?

  • Definition: A recession is a significant decline in economic activity across the economy lasting over a few months.
  • Indicators: Declines in real GDP, real income, employment, industrial production, and wholesale-retail sales.
  • RBI Definition: Prolonged decline in output experienced across much of the economy.
  • Criteria: Real GDP must fall for at least two consecutive quarters.

Recession: Types

Boom and Bust Recession:

  • Occurs when economic growth exceeds long-term expectations, causing inflation.
  • Central banks implement contractionary policies (e.g., raising interest rates).
  • Results in reduced spending, leading to a recession.

Balance-Sheet Recession:

  • Arises from excessive debt in the economy.
  • High debt leads to reduced spending as consumers and businesses prioritise debt repayment.

About Foreign Portfolio Investor (FPI):

Introduction:

  • Comprises Foreign Institutional Investors (FIIs), Sub-Accounts, and Qualified Foreign Investors (QFIs).
  • Aims:to streamline foreign portfolio investment regulations in India.

Key Developments:

  • K. M. Chandrasekhar Committee (2012):
  • Unified foreign portfolio investment routes for simplicity.

FPI Regime (2014):

  • Consolidated FIIs, Sub-Accounts, and QFIs into a single category.

Investment Flexibility (2018):

  • Allowed FPIs to invest in corporate bonds, G-secs, treasury bills, and SDLs without minimum maturity requirements.