Mumbai: While the Indian and Chinese equity markets are correlated now, investors will in the medium term start to appreciate the different dynamics of each country, says Ashutosh Datar, India economist, and Tiger Tong, China analyst, at the India Infoline Group in an email interview. Edited excerpts:
There are calls around the world for China to revalue the weak renminbi. How is this expected to help India?
China has made it very clear that it will adjust the renminbi (RMB) at its own preferred pace. Thus, though we expect China to allow an appreciation of the RMB from June, we expect the appreciation to be gradual, 3-5% and not sharp as some people expect. That said, a revaluation of the RMB will help the relative competitiveness of Indian companies both in the domestic market as well as international markets. China is India’s largest trading partner and India is a net importer of goods from China. During financial year 2009, India’s imports from China were approximately $31 billion (Rs1.38 trillion) while exports were just $9 billion.
China has commenced tightening its monetary policy. Will this have a ripple effect on, say, falling commodity prices, and benefit India indirectly?
We have to watch out for China’s headline inflation. As long as food prices are under control, the policy tightening from the People’s Bank of China (PBOC) is likely to be muted as China is still worrying about fragility of global growth. Thus interest rate hikes are likely to be moderate—54 to 81 basis points—unless food prices start rising rapidly. PBOC in such a case will rely more on non-market based measures such as credit rationing. However, any abrupt policy tightening from the PBOC could raise fears of a sharp slowdown in Chinese demand impacting both commodity prices as well as global growth assumptions negatively. While negative for India in the short run from an equity market perspective, a meaningful correction in commodity prices is beneficial for India from a macroeconomic perspective, given that the country is a net importer of commodities.
Graphic: Yogesh Kumar/Mint
The Chinese stock markets have also been underperforming for some time now. Will we see some foreign institutional money being rotated to India, or are we likely to see Indian markets fall too?
In the short run, we do not expect investors to discriminate between emerging markets. So if there is a sharp correction in China—be it due to global concerns or China-specific factors like stronger -than-expected tightening from the PBOC—it will imply a correction in equities across emerging markets including India. Over the medium term, however, we expect this correlation to reduce as investors appreciate the differing growth dynamics of each country as well as the secular trends at play in countries like India.
Are there any lessons for India to learn from the overheating of the Chinese economy? Do we need to be wary of possible asset bubbles?
Regulators and policymakers in India, especially the Reserve Bank of India (RBI), have always been wary of overheating and asset bubbles. One of the reasons India escaped the adverse impact from the global crisis was because of prudent policies by the RBI during 2006 and 2007. Thus, while we always need to be watchful of overheating and asset bubbles, the track record of our regulators gives us enough confidence that India is unlikely to face the same problems that (the) Western world is currently facing.