Mumbai: Though stronger local growth potential will continue to attract funds into India, the grim situation in Europe has led to a more volatile market, Sanjeev Patni, president and head of institutional equities at Prabhudas Lilladher Pvt. Ltd, said in an interview. Edited excerpts:
Now that the European bailout package has been finalized, what are its implications for the Indian market?
The European bailout package in effect is the second dose of massive liquidity injection into the global financial system after the bailout by the US of financial institutions, and just like the first one, should help with the continuation of the risk trades into emerging markets and commodities as well as continued flows into markets such as India.
With Indian growth standing out in the global context, the country should continue to attract robust flows aiding the market.
India, anyway, does not have any direct exposure to PIIGS (Portugal, Italy, Ireland, Greece and Spain) area debt and has a strong and sustainable growth momentum of its own. The stronger growth will continue to attract flows.
Also See FII Investment in India (Graphic)
Which are the likely ways any European contagion could affect India and the emerging markets? Is India already feeling the heat?
While the (European) package may help to ease the growing dangers of contagion across euro zone financial markets, it does not alter the fundamental need for an enormous fiscal squeeze across large parts of the euro zone. Indeed, the IMF (International Monetary Fund), EU (European Union) loans are conditional on fiscal consolidation and structural reform.
As such, PIIGS economies are still in a prolonged period of economic weakness. Against that backdrop, worries about the threat of default and ultimate future of the euro are unlikely to fade away and the euro could continue to weaken.
Now, with these relatively smaller countries having an impact overall on the world’s second largest currency, obviously this has much larger implications for global financial markets as well as India, and some of those concerns are already visible in the higher volatility of the market.
Will the increased liquidity result in more funds flowing towards emerging markets or a flight to safety to the dollar, US treasurys, etc.?
As I explained earlier, the effects of the bailout and the massive liquidity injection transpire in the form of further liquidity coming towards emerging markets, while the effect of the continuing euro crisis transpire in the form of liquidity being sucked out in the flight to safety trade to the US dollar, gold etc. Both of those factors are currently present in the (Indian) market due to which we are seeing higher volatility.
Where does China fit into the picture, considering the impact of international events on India’s equity markets?
China increasingly is also becoming part of global worries, as the massive stimulus that the Chinese government injected into the system last year is now transpiring in the form of heightened inflation and rising asset prices, which the Chinese government is no longer comfortable with.
However, if it tries to slow down too hard, its financial system could buckle under the burden of massive non-performing loans. Right now, the world is worried about that and we will need to see how China navigates through this phase and achieves a soft landing.
The biggest positive for China is the fact that the fiscal deficit in China continues to be extremely low and the debt to GDP (gross domestic product) is also low at just 20%.
As such the government of China should be able to handle things due to its strong balance sheet. The Chinese concerns help growth seeking flows to be directed into India, which is beneficial for our markets and investments.