India’s capital and financial markets are in a state of confusion and turmoil. In many ways, this turmoil has a lot to do with the global financial meltdown. But there are differences and several events appear to be marching to different tunes.
The best perspective is thrown up by glancing through media reports.
First came the observation that foreign funds had begun pulling their money out of India. This was to be expected, especially after the September collapse of the real estate, oil and other commodity markets. There was also the fear that the entire financial superstructure would crumble after the demise of Lehman Brothers Holdings Inc.
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Then came reports in the middle of January that the lowered interest rates in the US and the higher rates (1:4 at the minimum) in India had persuaded foreign institutional investors (FIIs) to look at India’s bond rather than equity markets. One contrarian view emerged from Mumbai-based brokerage India Infoline Ltd, which said that it expected domestic equities market to generate a return of around 30% in 2009. It believed that FIIs would return to the markets but suggested that it would be in the third or fourth quarter of 2009.
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Then came media reports towards the middle of March that FIIs were unlikely to return to India till the end of 2009.
Yet, all of a sudden, by mid-April, news began trickling in that FII interest in India had revived. This was notwithstanding a worsening political climate, a yawning fiscal deficit which threatened to get worse in the coming months and a downgrading of India’s rating to negative by Moody’s. By the end of April, news reports claimed that FII inflows had turned positive, wiping out the outflows after September.
What caused this sudden reversal?
Could there have been a correlation between foreign exchange inflows and the announcement by the US Senate panel on 3 March? ‘The Washington Post’ reported on 4 March that the Senate’s investigative committee would push Swiss bank UBS AG to release its closely held list of US clients suspected by the Internal Revenue Service of skirting taxes worth $100 billion (around Rs5 trillion), in an attempt to strengthen US tax laws as they apply to foreign accounts.