SUNIL SUBRAMANIAM: Prima facie, the answer lies in the word liquidity. I expected the infra-cycle to support Indian economic growth, but liquidity was a big contributor and that liquidity was fueled by weak economies in advanced countries, especially the United States. If you look at something like $ 13 trillion was printed in the G4 countries, mostly Japan, the United States, and of that total $ 29 trillion was expected. Thus, the liquidity that arrived and the expected liquidity caused these stock prices to rise. If you look at this liquidity pattern, of the $ 29 trillion over the next year, $ 9 trillion, or 30%, must come solely from the United States. Now the US is obviously printing notes, quantitative easing to try to get the economy going, but what’s happening is market participants don’t care if it goes to the US economy. . They revive the US stock market, they revive gold, they revive emerging markets. Why is this happening? This is because when the United States prints money, its budget deficit widens. When the public deficit widens, the dollar weakens. So when the dollar weakens, the currency of the other country gets stronger. So on top of that, they are doing rate cuts. Rate cuts are close to zero in the United States, already zero in Europe, negative in some euro area countries. So, for a typical hedge fund that accounts for a large proportion of market flows, they have a low cost of borrowing and they have higher return expectations from countries like India where nominal GDP growth is , not to mention the pandemic, is actually the highest. single digit and if you add inflation to that, you can get a double digit face value. So, you get a huge carry trade on interest rates, but this is reinforced by the strengthening of the emerging market currency, which gives the added icing to the pie they already have in their hands. So a double rally and so if you see the flow of money, of that liquidity meant to jumpstart the US economy, is actually a transmission leak to the emerging market. It’s number one. Now, within emerging markets, the fact that the recession resulted in a weakening of the commodity cycle meant that commodity imports into countries like India were unduly benefiting from the kind of flows that were heading into emerging markets. So, throughout the post-pandemic quarter, other emerging countries experienced positive months and negative months and India received a steady influx of FDI during these times. So if you put a percentage there, China and India are commodity importing countries, they would have accounted for 90% of FDI outflows to emerging markets here. So the Indian markets have benefited from this massive cash flow for the same reasons. Now, when will that flow be impacted or reversed, that is the question. This will happen when US growth returns, then US inflation will appear to rise, then the Fed will raise interest rates, then target liquidity and when that happens when US interest rates rise, the dollar will strengthen, when the dollar strengthens, money will flow to the United States So reversing the trend regarding the country that received the greatest influx will arguably lead to the greatest influx, because on top of that, when the US recovery will happen, the commodity cycle will resume as the United States will become an importer of commodities. Thus, when commodities increase, the little flow remaining in emerging markets will shift from commodity-importing countries like India to commodity-exporting countries like Brazil, Russia, Latin countries. There will therefore be a net outflow from emerging markets and, second, a reallocation. Thus, the Indian market is then a big short-term liquidity risk. Long-term pension funds will continue to invest because there is nothing detrimental in the pandemic to the history of long-term growth, but in the short term. And for proof of what I’m saying, let’s go back to May 2013 – the last time a tapering was done there was an earthquake. So the point is not where the problem is. The problem is, the US Fed, which is the ultimate decision maker on this, denies that fact that they are going to decline. They keep saying that this transient inflation that we are seeing now is not permanent but the equity markets believe it right now and therefore the flows continue, but the debt markets do not believe the Fed. So if you see in the debt market, interest rates have started to rise despite the Fed not raising them. So there is this disparity. Ultimately, the Fed can delay this by saying I don’t see the data, but when the data comes in, the Fed has no choice but to follow that data. So, in my opinion, the Fed can give up and delay this process for a while, but it’s just a matter of when, not if. If you take a poll of analysts, 45% of them think the last quarter of this October-November-December calendar year is when the Fed falls. Another 15-16% think it will be in the next quarter. So 16% of the market consensus says that in the next six to nine months, this decrease is going to occur. So I think that’s the biggest risk. Now, if the US economic news is bad, then the whole merry run of whatever is billed as normal growth will continue. The point is, I can’t say or guarantee that this will happen, but it will take a year at first and you will definitely see it. In general, what do we pray for? We pray that the global economy will recover because, at the end of the day, the stock markets follow the economy. So while in the long run a US recovery is good for Indian exports and all that, in the short run I think we want to prepare for this volatility resulting from the tapering discourse. Forget when the cone occurs. Thus, the markets always anticipate the future. This is my brief point that good news will lead to an early expectation of a downturn and markets tend to heed and react before that.



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