Well, so far this month, the MSCI India index is up just 0.61%, well below the 1.68% rise in the MSCI Emerging Market Asia index. In the last one month, the Bombay Stock Exchange’s Sensex is up a mere 0.58%. That seems to suggest that investors are concerned about the impending rate hike.

That may not be the whole truth, though. If we look at rate-sensitive sectors, the BSE Auto Index is down 0.15% in the last one month, but the Bankex and the BSE Realty Index have beaten the Sensex over the period. The Bankex is up 2%, while the realty index has gone up 5.3%. That implies the sluggishness of the Indian market could be due to other reasons, high valuations being the most obvious.

The reaction in the bond market, on the other hand, has been unequivocal, with the yield on the 10-year government bond near an 18-month high recently. The rupee, too, is significantly stronger than a month ago—the dollar was at 44.3275 on Friday, after hitting a high of 44.1650 on Thursday—on 17 March, it was 45.3475.

As a recent International Monetary Fund (IMF) study pointed out, global liquidity is five times as important as domestic liquidity for determining stock returns in emerging markets, so the impact of monetary tightening by RBI may not be much.

Global liquidity, on the other hand, is expected to continue to be abundant, as the rise in US jobless claims is likely to underline the fragility of the recovery to the US Federal Reserve. An IMF study forecasting that unemployment will continue to remain high in the developed world in 2011 will also be persuasive.

A more potent threat to equities may come from the US Securities and Exchange Commission’s crackdown on Goldman Sachs, if it is taken as a signal that US President Barack Obama intends to get tough with the banks. Recall that one of the reasons for the markets getting spooked in January was precisely Obama’s tough talk against the banks. At that time too, cash levels with investors was low and the Bank of America-Merrill Lynch risk appetite index was 46, the same level as now.

Nevertheless, underlying fundamentals continue to improve and any dip, as in January, is likely to be temporary. The fact that the Jakarta Composite Index has already breached the highs it scaled back in January 2008, becoming the first among Asian indices to do so, is a positive sign for other emerging markets.

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