Last week, Finance Minister P. Chidambaram had said the market should not be “so sensitive” to data flowing from the US but reflect Indian conditions.
“A fewer people are waiting for jobs in US or a few more people are waiting for jobs in US, how does it affect the fundamentals of Indian economy. It does not. I thought that is elementary...if they have come down or they go up has really no relevance or impact on Indian economy. “Nevertheless markets react to these signals that have come out of US. They reacted in the same way on May 22 when (US Federal Reserve chief) Ben Bernanke made a statement. They reacted in the same way to jobless claims numbers in the US. Sometimes I am surprised why they reacted,” he said.
Chidambaram may be surprised at market reaction, but for domestic market participants this is the time to pay more attention to the developments in the US, given that foreign institutional investors’ holdings in Nifty stocks are at life-time high. It is no secret that in a globalised world, FII buying or selling will have a huge impact on equity movements world over.
The US treasury 10-year-note yields rose to two-year highs on Friday, fuelling speculation that the Federal Reserve will cut down the $85-billion monthly bond buying programme as early as next month.
Given the stable economy and rising inflation in the US, many believe interest rates will increase, making them comparatively more attractive than emerging markets equity. The Fed has kept its target for overnight lending between banks in the range of zero to 0.25 per cent since 2008.
According to Morgan Stanley, external balance sheet risks from higher US real rates and a stronger US dollar will continue to pressure India. The Federal Reserve plans to release minutes from its July meeting on Wednesday. Global fund managers will remain on high-alert as always.
“Historically, portfolio flows into emerging and developing markets have inversely been correlated with change in the US rate cycle. In our view, Fed’s tapering plan is a significant risk to emerging markets,” said Emkay Global in its latest report. The rising proportion of US growth to global growth and weakening outlook for emerging markets is a reminder of the seven-year US expansion till 2000, which saw continued tightening by the Fed.
“With a lag, it led to a virtual drought of private flows into emerging markets and flight of portfolio flows averaged at 0.5 per cent of emerging markets’ GDP for several years (1997-2002),” Emkay added.