Volatility ahead
Experience with previous tightening cycles in the US shows that India is never totally protected from an emerging markets rout
The news last week that US wages in the second quarter grew at their slowest pace since 1982 shows that the recovery in the labour market there is still uneven. Yet, it may not be enough for the US Federal Reserve to postpone raising interest rates to next year. US monetary policy is likely to tighten by December.
The dollar rally, lower commodity prices and the financial troubles in China have combined to reduce the attractiveness of more risky assets. Global investors continue to pull money out of emerging markets funds. Asia has seen the maximum outflows, perhaps the highest in a decade.
India is one of the rare emerging markets that could actually benefit from lower commodity prices—other than select domestic industries such as steel. It is perhaps for this reason that money continued to come into Indian equities in July. But there could still be some volatility ahead. Experience with previous tightening cycles in the US shows that India is never totally protected from an emerging markets rout.
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