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India topped the emerging markets (EM) table for the third straight month in January as economic activity remained robust despite the Omicron variant of covid-19 sending several parts of the country under restrictions for about two weeks, shows Mint’s monthly EM tracker. Indonesia emerged a distant second, with its currency proving to be the laggard. (See chart on page 7)

Mint’s Emerging Markets Tracker, launched in September 2019, takes into account seven high-frequency indicators across 10 large EMs to assess India’s relative position in the league table. It is updated around the third week of every month, once all the data is available.

 

The looming interest rate hikes by the US Federal Reserve and the Ukraine crisis weighed on the performance of peers such as China and Russia, while other countries grappled with slow economic growth and high inflation.

China, the world’s second-largest economy, performed poorly in January as real estate regulatory issues and “zero-tolerance" covid-19 restrictions ahead of the Winter Olympics continued to drag economic activity and stock markets.

In India, the spread of Omicron from early December threatened to derail economic recovery, but the third wave turned out to be milder and shorter than the previous one, causing negligible damage. High vaccination coverage and sustained herd immunity helped contain hospitalization rates even though Omicron was a more transmissible variant.

As a result of the restrictions, the manufacturing Purchasing Managers’ Index (PMI) slowed down to 54.0 in January from 55.5 the previous month, but it was still a strong rate of expansion. The services PMI fell to 51.5 from 55.5, but that, too, stayed in the expansionary zone. A PMI reading above 50 denotes month-on-month expansion.

Demand for Indian goods remained strong, with exports rising 26% from a year ago. But Russia, Indonesia and Brazil performed even better. India made up for lost ground through a strong rupee and the continued involvement of domestic institutional investors, keeping an uncertain stock market afloat. Even though the US Fed’s rate hike outlook hurt most EMs, India’s stock market capitalization managed to rise 4.7% month-on-month, leaving others behind despite high valuation worries. To be sure, foreign institutional investors continued to dump Indian shares in January.

Retail inflation did not breach the Reserve Bank of India’s upper tolerance limit of 6% by a huge margin, allowing breathing room to the accommodative rate-setting panel even as other EMs struggle with rising prices. Base effect-led mild inflation prints have so far given India a competitive advantage over Russia and Brazil, among others, which have already embarked upon an interest rate hike cycle. While inflation is unlikely to rise to an uncomfortable level in the coming few months, policy normalization by RBI is imminent.

These gains could reverse soon, with spillovers from surging crude oil prices, analysts said. Brent crude oil price is currently hovering over $90 per barrel as against around $70 per barrel at the end of last year. India, being a net importer of crude oil, could see an impact on inflation, rupee, and current account deficit. Russia, the world’s second-largest exporter of crude oil, could gain on this front despite tensions in Eastern Europe. Indonesia could also see indirect gains through higher prices of edible oils.

The Ukraine crisis could also weigh on the performance of EMs, including India, in the coming days. Barring that risk, the Indian economy is on track to full recovery this financial year from the pandemic losses even though the GDP growth rate is likely to decline with fading low-base effect.

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