Silicon Valley Bank Collapses: What It Means For India3-mins read

Silicon Valley Bank (SVB), a leading US bank known for serving startups, venture capitalists, and tech companies, recently collapsed, sending shockwaves through the financial world. This comes on the heels of the failures of Silvergate Capital Corp. and Signature Bank, leading to increased market volatility and global economic panic. Given the interconnectedness of economies, it is difficult to imagine that any significant event in the world’s largest economy would not have a ripple effect on all economies.

Bigger They Are, Harder They Fall

The root cause of SVB’s downfall was an investment imbalance, which could have dire consequences for the global economy. A research group predicts that US household expenditure will be the next engine to fracture after global manufacturing and housing sales decline. This could lead to risk-aversion among consumers and the banking sector, potentially cooling the labor market, and causing asset markets to correct, resulting in a reduced wealth effect.

The crisis at SVB is not only a concern for the US economy but also has implications for the Indian economy, as liquidity, pricing, and demand channels are interconnected. The slowdown in FII outflows is already affecting India’s Balance of Payments (BoP), and if the RBI aggressively defends the Indian Rupee, the banking sector could be threatened. Additionally, a fall in commodity prices due to a strengthening US dollar could affect nominal factors such as tax collections and credit growth. The Indian service exports, which were strong in the previous year, may also slow down if the disease spreads.

Looking forward, there are likely to be earnings downgrades in 2023, and global growth will strongly affect Nifty earnings. World M1, a leading Nifty earnings indicator, shows a severe decline in FY24, which may lower consensus growth predictions for teen earnings. As a result, a heavy defensive tilt is recommended, with overweights in FMCG, cement, domestic auto, pharma, IT, and telecom in less discretionary sectors. It is best to avoid domestic and global cyclical stocks, as the demand downturn balances input price tailwinds.

Furthermore, policymakers should consider the potential impact of SVB’s collapse on the global financial system. SVB is a globally significant institution, and its failure could potentially trigger a systemic crisis. As such, regulators should be vigilant in monitoring the situation and taking steps to mitigate the risk of contagion.

Post-Silicon Valley Bank: What Now?

In conclusion, the collapse of Silicon Valley Bank has far-reaching implications for the global economy, particularly for the Indian economy, given the interconnectedness of financial systems. Policymakers and investors should be prepared for increased volatility and take appropriate measures to mitigate risk.