13/7/2014

Weathering the emerging storm | Business Line

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Weathering the emerging storm

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The tendency to paint all emerging economies with the same brush is hurting India

The events of the past fortnight have shown that India is not insulated from crises that engulf emerging markets
(EM) even if it is economically less vulnerable than some others in this grouping. Global investors do not appear to
differentiate between stronger and weaker EM economies when driven by an overwhelming urge to sell what they
perceive as risky assets and move their money to safer havens. While Argentina and Turkey may have had issues
specific to their economies resulting in a steep erosion in the value of their currencies, concerns over slowing growth
in China have led to the perception that EMs are a risky category in general. This, despite the fact that not all EM
economies are commodity exporters and heavily reliant on the Chinese market. These fine distinctions which ought
to actually favour a largely commodity-importing country such as India simply dont seem to matter today. The last
week of January alone when it all really exploded saw more than $6 billion being pulled out of global EM equity
funds.
Foreign institutional investors (FII) in India, too, have pulled out over $2.1 billion since January 24, after having
pumped in some $3.65 billion from the start of the year. While only a third of the total withdrawal may have been on
account of equities, the excessive dependence of our stock markets on FII purchases has resulted in the Sensex and
Nifty shedding roughly five per cent since the global EM sell-off began. The US Federal Reserve announcing a further
$10-billion reduction of its monthly bond-buying programme has clearly had an adverse effect this time round
unlike in December when the first instalment of tapering was unveiled. Although the harm to India from the Fed
action along with the current EM sell-off has been limited mainly to its stock markets and not the rupee a marked
contrast to June-August 2013 the fact of our basic vulnerability to global capital movements remains. The Reserve
Bank of India Governor Raghuram Rajans complaints about the breakdown in international monetary cooperation,
as reflected in the US unilaterally pressing ahead with its monetary stimulus unwinding, only reinforces this
http://www.thehindubusinessline.com/opinion/editorial/weathering-the-emerging-storm/article5657310.ece

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13/7/2014

Weathering the emerging storm | Business Line

unfortunate truth.
For now, India has very few options but to ride it out. The things going right are its vastly improved macro-stability
indicators on the fiscal, inflation and balance of payments fronts. Besides, nearly 85 per cent of the cumulative $173
billion of FII funds in India are parked in equities and only the balance in debt instruments. FIIs have already sold a
big chunk of their debt holdings, which tend to be more volatile and short-term in nature. Equity investors typically
have longer term horizons and look primarily at growth rates that an economy offers. That is what our policymakers
should also focus on.
(This article was published on February 5, 2014)

http://www.thehindubusinessline.com/opinion/editorial/weathering-the-emerging-storm/article5657310.ece

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