Were the market movements in January an indication of a sell off from an overvalued market? Not necessarily. While the broad global story continues to be of a persistent slowdown, India?s is a formidable growth story. These two strands together are driving the stocks, the currency and the bond markets. In January, there was a large sell-off by the foreign institutional investors in equities. As a category they have withdrawn $52 million. Simultaneously, the domestic institutional investors have also been net sellers of about $285 million. The drivers that shaped the market as an attractive destination may have weakened in January with the expected exit from monetary stimulus dominating discourse?the exit of course began on Friday. RBI governor Subbarao?s comments that government borrowing could be higher in the next fiscal could spook markets even further. But these are short-term triggers. The investors are taking their money off the table, as they feel they need to book profits at this stage.
Importantly, all the pressures developing in India stem from the efforts to finance growth, not to effect any bailout. This is a very big difference from elsewhere in the world, particularly the Western economies, which must be kept in mind. All the latest indicators suggest positive news?even exports are growing (9.3% for the month of December 2009) and RBI expects growth to touch 7.5% at the end of this fiscal. This is because the Indian economy has delivered on its promises. What the players in the financial markets are now looking at is how smoothly RBI and the finance ministry exit from the stimulus packages that have helped the growth rates to sustain. The orderliness of the retreat will determine if the markets will remain orderly. In the global scenario, too, the nature of unwinding is the big ?if? for all investors. RBI has already played its hand with a 75-basis-point rise in the cash reserve ratio. It is now the budget, in around a month?s time, that will be the trigger to which all the markets will react. Until then, it is difficult to see any big investments in the Indian market. In the interim, however, two events could make some difference. The first will be the release of GDP data this week. And the second will be the levels of subscription to the four major disinvestments, of which two are due in February. At any rate, it is safe to assume that investors are not about to pull the plug on the India story anytime soon.