SUNIL SUBRAMANIAM: Prima facie, the answer lies in the word liquidity. The infra cycle I expected to support the Indian economic growth, but the liquidity has helped in that in a big way and this liquidity has been driven by the weakness in the advanced countries economy, notably the U.S. If you look at it something like $13 trillion has been printed in the G4 countries, primarily Japan, the U.S., and of this other 29 trillion was expected. So, the liquidity that has come in and the expected liquidity have driven up these stock prices. If you study this liquidity pattern, out of the 29 trillion over the next year, 9 trillion, which is 30% has to come only from the U.S. Now, the U.S. is obviously printing notes, quantitative easing to try to revive the economy, but what happens is, market participants don’t care abut whether that goes to the U.S. economy. They revive the U.S. stock market, they revive gold, they revive the emerging markets. Why does this happen? That is because when the U.S. prints money, it’s fiscal deficit widens. When the fiscal deficit widens, the dollar weakens. So, when the dollar weakens, the other country’s currency strengthens. So, along with this, they do rate cuts. Rate cuts are near zero in the U.S., already zero in Europe, negative in some countries in the Eurozone. So, for a typical hedge fund which accounts for a significant proportion of the flows into markets, they have low cost of borrowing and they have a higher return expectation from countries like India where the nominal GDP growth, leave aside the pandemic is actually the highest single digit and if you add inflation to that you can get nominal double digit. So, you’re getting a huge interest rate carry trade that’s one, but this is enhanced by the currency strengthening of the emerging market which gives the additional icing to the cake that they already have on their hands. So, a double rally and so if you see the flow of money, of this liquidity intended to revive the U.S. economy, is actually leaking transmission into the emerging market. That’s number one. Now, within the emerging markets, the fact that the recession led to commodity cycle weakening meant that commodity import in countries like India were an undue beneficiary of the kind of flows that went into emerging markets. So right through the post-pandemic quarter, other emerging countries have had some positive months and some negative months and that India, got a consistent foreign FDI inflow through those periods. So, if you actually put a percentage number to it, China and India are commodity importing countries, they would have accounted for 90% of the FDI outflows into emerging markets here. So, the Indian markets have benefited from this massive liquidity flow for these very reasons. Now, when will this flow get impacted or reversed is the question. It will happen when U.S. growth is returning, U.S. inflation then seem to be rising, then the Fed will hike interest rates, then target the liquidity and when that happens when U.S. interest rates rise, the dollar strengthens, when the dollar strengths, money flows into the U.S. So, the reversal of the trend about which country got the biggest inflow will arguably get the biggest outflow because on top of this, when the U.S. recovery happens, the commodity cycle will revive because U.S. will become an importer of commodities. So when commodities rise, then whatever little emerging market flow remains, will get shifted away from commodity importing countries like India to commodity exporting countries like Brazil, Russia, the Latin countries. So, there will be a net flow out from the emerging markets and second, a reallocation. So, the Indian market then is a big risk from the short-term liquidity. The longer-term pension funds will continue to invest because there’s nothing damaging in the pandemic to the long term growth story, but in the short run. And for evidence of what I say, 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 issue is. The issue is that the U.S. Fed who is the ultimate decider of this, denies this fact that they are going to taper. They are keeping on saying that this transient inflation that we see now it’s not permanent but the equity markets are believing it right now and so the flows are continuing, but the debt markets are do not believe the Fed. So, if you see in the debt market the interest rates have started rising despite the Fed not hiking it. So, there is this disparity. Ultimately, the Fed can delay this by saying I don’t see the data but when the data comes, the Fed has no choice but to follow that data. So, according to me, the Fed can talk down the taper talk and delay this process for some time but it’s only a matter of when and not if. If you take a poll of the analysts, 45% of them believe that the last quarter of this calendar year October-November-December is when Fed will taper. Another 15-16% believe it will be in the following quarter. So, 16% of market consensus says that within the next six to nine months, this tapering is going to happen. So, I believe that that’s the biggest risk. Now if the U.S. economic news comes bad, then the whole jolly ride of whatever is laid out as the normal growth will continue. The point is I can’t say or guarantee that this will happen but take a year at the outset and you will definitely see that. Generally, what do we pray for? We pray for the world economy to recover because ultimately equity markets, follow the economy. So, while in the long run a U.S. recovery is good for Indian exports and all that, in the short run, I think, we want to be prepared for that volatility from the taper talk. Forget about when the taper happens. So, the markets always anticipate the future. That is my brief point that good news will lead to an early expectation of taper and markets tend to discount that and react ahead of that.
