Indian stock markets: round one to the Fed. But is the illness cured?

Indian stock markets will open today, sharply up. That’s no startling prediction, Asian markets that have already opened have gained and India will be no different. Monday and Tuesday saw India re-coupling with global markets, with the Sensex closing at 16730, down 17% from a week ago.

In recent months, as Indian stock indices soared, a popular theory was propounded by analysts, the decoupling of Indian markets from the world. That meant to suggest that if the world economy, US mainly, had problems that had nothing to do with us. That theory is in tatters now.

The Indian economy will no doubt continue to grow. But the money that has been sloshing around, pushing up equities, is global in nature. That is the weak link that can derail markets across the globe. Money flowing out or more likely the fear that more money will flow out, would have prompted the steep fall in equities. The 75 basis points drop in the Fed Rate will have a cascading effect on currency values, interest rates and hence bond yields across the world.

How this pans out will determine to what extent investors think equities are still an attractive asset class. The immediate impact will be positive but expect more certainty over a longer period, six months to a year. Till then, investors will be quite edgy, especially foreign investors, who are the driving force in the Indian markets.

Even moderate, expected events -lower than expected industrial growth numbers, tapering earnings growth and the like- will have an exaggerated effect on sentiment. The US recession, if and when it arrives, will be the factor to watch for. Overseas data releases will be watched closely than earlier. Wonder how soon the decoupling theory makes the rounds again.

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