Markets in a state of disbelief

“Markets stop panicking when the authorities begin to panic.”

The logic behind this old adage is intuitive: in a sudden crisis, financial markets typically price in the worst-case scenario well before governments, central banks, and regulators even acknowledge the problem. Once the authorities do act — through stimulus, rate cuts, liquidity injections, or other interventions — the corrective measures tend to limit the actual damage, providing an immediate floor and often a sharp rebound to stock prices that had already discounted catastrophe.

Empirical evidence

1990 — Balance of Payments Crisis: Fuelled by fiscal deficits, dwindling foreign reserves, and the Gulf War oil shock, India was pushed to the brink of sovereign default. The government’s eventual response — including pledging gold reserves and accepting an IMF bailout — marked the beginning of India’s landmark economic liberalisation. Markets recovered.

1998 — Asian Financial Crisis Contagion: Contagion from the 1997 Asian Financial Crisis rattled the rupee and slowed growth. Tight monetary policy and fiscal prudence steadied the ship.

2008 — Global Financial Crisis: The collapse of Lehman Brothers triggered a sharp stock market crash and industrial slowdown. A coordinated response of fiscal stimulus, rate cuts, and liquidity injection arrested the fall.

2013 — Rupee and Current Account Crisis: A widening current account deficit combined with US Federal Reserve tapering signals drove the rupee to ₹68/USD with inflation surging. The RBI’s decisive rate hikes and forex market interventions restored confidence.

2020 — COVID-19 Pandemic Shock: Nationwide lockdowns contracted GDP by an estimated 7.3%. But aggressive fiscal support (PMGKY), RBI liquidity measures, and deep repo rate cuts helped markets stage one of their sharpest recoveries on record.

In each case, the pattern held: authorities panicked (or at least acted decisively), and markets calmed.

The latest episode

The Indian economy is navigating a confluence of serious headwinds. The India-Pakistan military stand-off in May 2025 rattled investor sentiment. Sweeping changes to US tariff and immigration policy, which began taking effect through 2025, disrupted trade flows and created uncertainty for Indian exporters and the IT-services sector. An escalating conflict in West Asia — with implications for oil prices, remittances, and regional stability — has added another layer of risk as of early 2026.

Financial markets have responded accordingly, and painfully. Bond yields have risen sharply. The rupee has weakened significantly, ranking among the worst-performing major currencies over the past year. Equity markets have corrected meaningfully — the Nifty 50, which stood near 23,465 in mid-2024, has gone essentially nowhere in two years, even as several peer markets have advanced. Indian equities have strikingly underperformed comparable emerging markets.

So far, this fits the familiar script. Market pricing in the worst.

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The adage is being tested

The Prime Minister has, in recent public statements, signaled growing concern about the economic situation — a rare and telling departure from the usual official optimism. The RBI Governor has similarly struck a more cautious tone. In other words, the authorities appear to be beginning to panic.

By the logic of the old saying, this should be the inflection point. Markets should be bottoming out. Relief should be setting in.

And yet — the panic in markets is not subsiding.

Why are markets in a state of disbelief?

Is it that investors doubt the adequacy of the policy response? Is the nature of this crisis — multi-front, geopolitical, and partly beyond India’s control — fundamentally different from past ones? Or is something else at work?

…more on this next week