Concerns are rife that interest rates may soon head up and stunt the rally in stock markets.

Morgan Stanley executive director Sridhar Sivaram says global interest rates will hold the key to the performance of Indian and other emerging markets, but doesn’t expect rates to rise in a hurry. Edited excerpts:

Optimistic: Morgan Stanley’s Sridhar Sivaram.

How are you reading where the wind is blowing from here? Are you also afraid of rising interest rates and do you predict a correction, or is momentum still strong?

Actually, contrary to that, I think markets in India and the emerging markets will depend on what happens to global interest rates. Our own belief is that global interest rates are not moving up immediately, at least not in the next six months. And, if that be the case, then emerging markets... will continue to do extremely well and so will India along with that. So I wouldn’t be in that camp, currently, which should be very sceptical about markets moving up. I think may be in the next six months, we could see them touching or reaching the earlier highs also. But...I would have to say that we don’t see this as a bull market by any stretch of imagination and this is a cyclical bull market within a bear market and liquidity is abundant right now. The emerging market as an asset class is currently seeing good flows from there, so we would continue to benefit from that.

What is pushing the liquidity towards us?

It is also because emerging markets are seeing higher growth. So it’s money chasing growth currently. I would want to believe that this segment of liquidity, which is coming into emerging markets, will continue to come. Because even though one can argue that developed market valuations are cheaper, they still have leverage issues; the debt to gross domestic product in the US is still above 300% and so issues of developed markets are still not over... People are looking at asset classes where they can find growth and I guess emerging markets and in particular may be India and China would stand to benefit from that.

What exactly are you hearing about money flows—is it cash that was lying unallocated that is coming in, or is it fresh money into India funds, Asia funds and even exchange-traded funds (ETFs)?

ETFs have surely seen a lot of inflows. So it’s very difficult to actually pinpoint whether these are actually India funds or anything specific like that, but from anecdotal evidence what we also hear is that a lot of developed market funds are also putting in some allocation to emerging markets. And, the easiest way for them to do is to either buy an ETF, or just buy the index itself rather than taking stock calls, so we do see lot of that coming in. And, that is a big pie even if a small percentage of that comes in.

You used the phrase “cyclical bull market within a bear market"—so is it your assessment that once interest rates start to go up globally, this party ends?

Exactly, that is when this party ends. So the global interest rates would be the key determinant of how long this party continues. At the same time one has to keep in mind that for a bull market to really come back you need all the economic parameters to look good and currently they don’t, apart from a few countries here and there. We cannot say that all the economic parameters look good, there are obviously green shoots, but that is about it.