India loses top EM spot in September as Vietnam surges in exports, stocks

The gap with Vietnam in the latter two was significant enough to pull India’s ranking lower.India’s stock market capitalization declined 2.2% month-on-month in September, underscoring the paradox that has defined India’s growth story in recent months—resilient economy alongside sluggish stock market and external vulnerabilities. Vietnam, on the other hand, posted a 2.7% rise. When it comes to export growth, India’s 23.0% figure looked strong in isolation, but completely paled in comparison to 39.5% recorded by Vietnam.

In fact, China (3rd rank), Malaysia (4th rank), and Thailand (7th rank) recorded stronger export growth than India in the range of 24.1% to 54.7% in September. For other economies, the latest available comparable figures were for August. While India remained the fastest-growing major economy, with 7.8% growth in April-June, Vietnam has clocked better growth with 8.8% in the same quarter. The latest growth data for July-September was even better at 10%, buoyed by booming exports and surging foreign investments.Worsening inflation—1.5 percentage points higher than the Reserve Bank of India’s medium-term aim of 4.0%—also dampened India’s position.

The rupee, on average, remained stable in September compared to August; four other EM currencies, including Vietnamese Dong, appreciated 0.4% to 0.6%.All these factors were more than enough to offset India’s better position in manufacturing purchasing managers’ index (55.1 compared to 51.9 for Vietnam) and structural edge in import cover (10.6 months as against only 1.9 months for Vietnam). India continues to feel the fragility on the currency and stock market fronts.

To begin with, foreign investors fled the Indian equity market more aggressively, withdrawing ₹45,785 crore between 1 October and 26 October—the highest since June. Despite this, the benchmark reflected some rebound in October, rising from 72,480.29 on 30 September to 73,606.75 on 26 October. However, the levels were still sharply lower than in early September. When it comes to currency movement, the rupee has strengthened from 95.99 per dollar at the end of September to 95.19 on 26 October.

This, however, has not come from natural strength, but a series of targeted measures announced in early October to reduce open-market dollar demand and curb speculative pressures. While the rupee has strengthened, RBI’s foreign exchange reserves are expected to take a further hit on top of the $64.69 billion decline in the six weeks following the record-high level of $785.70 billion on 4 September.

With price pressures continuing from the West Asia war—India’s crude oil basket has averaged $120.3 per barrel in October so far as against $116.1 in September—India’s inflation situation is expected to worsen. Along with food price rises and passthrough of input cost pressures, the base effect could push inflation up to 6% in October, resulting in at least two more interest rate hikes by the RBI.

As US bond yields remain elevated and the US Federal Reserve is expected to raise interest rates further, it creates a high bar for EMs, including India, in attracting foreign flows.Growth moderationAgainst the backdrop of rising inflation and interest rate, India’s growth is expected to slow down to 7% in the second quarter of the current financial year, according to Icra. The recent flare-up in prices is expected to weigh on business margins and value-added growth in the industrial sector, while deficient monsoon will pull agriculture growth down. A higher interest rate environment could also dampen India’s credit growth, which played a key role in supporting growth in earlier quarters.