The irony is that when the much-anticipated correction finally came, the trigger happened from an entirely unexpected quarter—US President Barack Obama’s decision to finally take on the banks. But then that’s the nature of corrections. The other global trigger—the tightening of monetary policy in China—was entirely expected.

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Graphic: Yogesh Kumar / Mint

Fund flows to Asia have slowed considerably, in part because of a stronger dollar, which affects the dollar-carry trade. Importantly, as Citi Investment Research points out, cash weights at global emerging market funds are close to all-time lows, cash levels at global funds, too, fell to three-year lows in December, while cash levels at Asian funds are well below the pre-crisis average. A Citi research note dated 25 January says, “From these levels, GEM (global emerging market) funds would have historically started replenishing cash holdings. As such, we expect GEM funds’ net purchases of Asian equities to drop in the weeks ahead.”

Analysts have been warning for months about overvaluations, the clogged initial public offering pipeline, rising interest rates and the withdrawal of fiscal sops in the Budget. Those are all valid concerns, but equally valid has been the recovery so far.

Will the tightening of liquidity affect markets? During the last cycle when markets fell on fears of the first round of rate tightening in the US, conditions in India were worsened due to a Left-supported government coming to power and there was a crash in all markets, including India, in May 2004. It wasn’t until October 2004 that the benchmark Sensex index, was able to get back to the highs it reached in May. This time, relatively speaking, India is much better placed than most of the world and it’s unlikely to take that long.

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