Equity funds, that EPFR Global tracks, absorbed nearly $1.5 billion in the week to June 2, 2010; in the previous week they had seen collective redemptions exceed $20 billion. That?s good news because in the week to May 26, over $13 billion had moved out of US equities. The better macroeconomic numbers from the US and Europe, says EPRF Global, may have prompted some investors to move back into asset classes that ?could prove to have been oversold? in the latest crisis of confidence triggered by the problems in Greece, weaker Chinese data and the oil spill in the Gulf of Mexico. To be sure, markets across the globe continue to be vulnerable to the financial turmoil in the Eurozone, which will delay economic recovery.
Since the problems can?t be wished away, it means copius quanties of liquidity are on their way—-according to Morgan Stanley, recent global uncertainties have made it likely that major economies will continue providing ?XXL liquidity.? So while this may make fund managers a tad nervous in the near term, the consequent flood of liquidity will undoubtedly help emerging markets including India. So although foreign institutional investors may have pulled out money from the Indian market in May and in June, they will surely return. In fact, many of the long-only funds have stayed put and it?s some of the hedge funds that are taking money off the table. That?s not surprising given that the long-term India story looks good; the capex cycle is clearly turning, commodity prices seems to be headed down, the monsoon will make it on time and money is not likely to become too expensive. More than anything else, demand is clearly intact judging by the car sales in May.
In all this, it should not be difficult for the government to borrow Rs 3.4 lakh crore (5.5%of GDP). But as Enam Securities points out, the borrowings are high and there are subsidies that may not have been fully budgeted for, which make India fairly dependent on external liquidity, the highest in the decade. Should, for some reason, the current account deficit exceed 3%, India would need estimated inflows of $30 billionto be able to absorb any sudden shocks. However, crude oil prices are likely to stay benign, we have forex reserves of close to $275 billion and GDP growth should be above 8%, so the probability of any serious problem is very low. In fact, with the 3G collections of Rs 60,000 crore and an additional Rs 30,000 crore likely from the BWA auction, the government may well end up borrowing less than it had earlier planned. Also compared with the view earlier this year that interest rates could shoot up, there?s actually a chance that the yield on the ten-year benchmark bond, which is ruling at levels of 7.5%, may be capped at 8%.
There?s a bit of a liquidity crunch in the market but analysts at Standard Chartered believes that although an amount between Rs1.8 lakh crore and Rs 2 lakh crore, could move out of the system in the short term, the potential for a shortfall is just about Rs 40,000?50, 000 crore which could peak at around Rs 60,000 crore. Once the government starts spending, which it should start doing soon, there should be enough money for both individual and corporate borrowers.