Has de-coupling happened?
Stock prices come tumbling down in the US, Europe and Asia, but Indian stock prices continue to climb, and the key indices are not far from their all-time highs. The financial and economic news gets from bad to worse in the United States, and the dreaded ‘R’ word (for recession) has begun to get used as the housing market tanks and employment numbers fall for the first time in four years. But Indian markets continue to bounce along, recovering by some 10 per cent from the trough it hit last month. Is it possible that the de-coupling thesis — which says that the Indian market will strike out on a different course from those in the west — is turning out to be true? If so, it would be a striking development, for until now the accepted wisdom was that the foreign institutional investors (FIIs) dictated, through their conduct, the direction of Indian stock prices. If they were investing, Indian prices went up; if they were selling, the prices fell. That no longer seems to be the case; or more correctly, the same institutional investors who are selling in other markets may be buying here. If true, that would mean, among other things, that as part of the “flight to safety”, global investors with a long-term outlook are looking for safe harbour in Indian bourses.
If these optimistic hypotheses are what explain current stock price trends in India, the underlying explanation can only be that the markets are responding to the strengths of the Indian economy. For one thing, the currency risk that is a standard element in emerging market assessments, is not the same any more as the rupee notches up gains against the dollar. But the more important reason is that the Indian growth story has so far been unaffected by the turmoil in global markets and its fall-out. The first-quarter GDP growth numbers have been flattering, industrial growth has maintained its tempo, and companies continue to do well. Exports have decelerated, but agricultural growth will be helped by the good monsoon. Such slowdown as has occurred so far has been on account of domestic factors, mainly the Reserve Bank’s response to the signs of overheating early in the year. Indeed, the onset of the sub-prime crisis in the US has helped India get rid of its problem of plenty, namely a flood of dollars that was adding to domestic money supply and making monetary policy difficult. Indeed, if the Federal Reserve in the US were to cut interest rates next week, as is widely expected, the RBI could do the same here — something that would have been unthinkable three months ago.
Of course, the current economic tempo cannot continue indefinitely; the July industrial production numbers are due this week and will give some pointers, as will the second-quarter corporate sales and profit numbers that will come early next month. But most analysts assume that even if there were to be a slowing of the current tempo, GDP growth in the year as a whole is unlikely to drop below 8.5 per cent — which would be very good going in a rocky global environment. What investors may not have fully recognised, though, is the full impact on corporate bottom line. For the moment, what seems to be true is that the hedge funds that have faced liquidity pressures overseas have been selling their Indian holdings, while long-term players among the FIIs have been busy picking up stocks. If this trend continues, the FII presence in the Indian market will have acquired a healthier hue as the role of the hedge funds gets diluted.
