How much has changed in the last few weeks ! After Greek debt has been accorded junk bond status, Portugal and Spain have been downgraded by S&P triggering fears of more sovereign defaults and the consequent impact on French and German banks that have lent to these countries. Also, even though GDP growth in the US has been a remarkable 3.2%, the Fed has said it?s committed to leaving interest rates at exceptionally low levels for an entended period. India has little exposure to the PIIGS nations and so there?s no real cause for concern on that front.
But low interest rates in the US mean that the dollar carry trade continues uninterrupted and that cheap money could continue to flow into commodities pushing up prices further. That is not great news for India though the rupee remains reasonably strong, even at its five-week low of just under Rs 45, because the government will have to borrow more. Right now though, the debt markets aren?t in the least spooked even though the government?s looking to borrow Rs 1.3 trillion in the three months to June 2010. Indeed, so far, they?re in a merry mood, rallying and with big volumes. The yield on the new ten-year benchmark has come off to 7.60% levels when the market has all along been anxious that yields will be on the wrong side of 8%. Dealers are now less apprehensive about increases in interest rates and there?s hardly any talk of a rate hike between meetings. With borrowers not exactly rushing to banks ?credit growth is a modest 17.5%—there appears to be plenty of money. And since the equity markets have allowed them to pick up money both at home and abroad—Essar Energy has raised closed to $2 billion on the LSE, companies are hardly strapped for cash. Indeed, the continuing dollar carry trade will mean more inflows into emerging equity markets including the Indian equity market. India has been something of an underperformer this year despite, FIIs having poured in close to invested $6 billion, of which 67% has come into the secondary market, most of which —$5.6 billion—having been invested in 30 sessions between February 26 and April 16. It?s the strong currency that has really helped investors. Nevertheless, so far both the stock and the bond markets have held up exceedingly well. Hopefully, both markets will not be stressed over the next six months or so because otherwise companies will not have the confidence to start investing in big projects and the capex cycle, so to speak, will take a little longer to turn. As long as there?s money to be invested, India will continue to receive its fair share of foreign inflows. As market expert Christopher Wood has pointed out, India?s neutral weighting in the MSCI Asia Ex-Japan is ?unnaturally low?;India has the second largest nominal GDP in Asia but only the fifth highest weighting in the MSCI. For both Brazil and India, the market capitalisation increased from $250 billion in 2003 to $1.3 trillion currently. But while Brazil?s weight in the MSCI has increased by 83% from 9.2% to 16.9%, India?s weight has increased by only 32%.If India?s MSCI weight were to catch up with the market capitalisation, then more than $20 billion would be required to be neutral India.