Friday’s crash led by the Argentine peso and Turkish lira, which plunged to record lows, is indicative of a fresh flight of global money from emerging markets (EM). Although it has come ahead of the US Federal Reserve’s policy meeting on January 29, the trigger for the latest sell-off has to do more with a slowing Chinese economy than a possible further taper of monthly bond purchases by the former. Most EM economies are commodity-exporters heavily dependent on China, which buys everything from Indonesian coal and Brazilian iron ore to Chilean copper and Argentine soyabean. China’s growth dipping to 7.7 per cent in 2013 for a second consecutive year — and a report by data analytics firm Markit Economics suggesting that its manufacturing sector may even contract this month — is bad news for these economies.

But Chinese factories consuming less crude oil, coal, copper or zinc isn’t necessarily bad for India. The country, far from being an exporter, imports the bulk of its non-agricultural commodity requirements. In 2012-13, India’s imports of ores, scrap and non-ferrous metals topped $20 billion, not to speak of the $170 billion spent on oil, $54 billion on gold and $10 billion-plus on fertilisers. To this extent, a slowing Chinese engine will help cool global commodity prices further, the effects of which are benign for India and quite the opposite for Brazil or Russia. The current EM sell-off is also different from the one in mid-2013, which was primarily driven by US Fed taper fears. The latter prospect, translating into reduced global liquidity and fund flows to EMs, impacted India the most because of its unsustainably high current account deficits (CAD). As foreign institutional investors (FII) sold over $13 billion of Indian debt and equities during June-August, the rupee was the worst-performing EM currency tumbling by nearly a fifth against the dollar.

But things have improved since for India, with the CAD falling, official forex reserves rising and FIIs making net purchases of over $7.5 billion from September till date. After sliding to a record 68.36 to the dollar on August 28, the rupee is hovering around 62, making it the best-performing EM currency. Although the Sensex closed 240 points lower on Friday, it was a sympathetic response to the overall EM situation rather than an India-specific phenomenon. But policymakers will have a lot of hard work to do if China’s faltering growth is to work for India’s advantage. The CAD may have been somewhat managed and food inflation relatively tamed now, but the real challenge remains: of stoking growth. Till that happens, global investors will continue to club India with other EM economies.

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