Weathering the ‘emerging’ storm

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 don’t 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 Rajan’s complaints about the “breakdown in international monetary cooperation”, as reflected in the US unilaterally pressing ahead with its monetary stimulus unwinding, only reinforces this 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.

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