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A host of meetings of some of the world’s top central banks may put a squeeze on liquidity flows into Indian equities as investors turn wary amid rising concerns over the Omicron variant of coronavirus.
The US Federal Reserve, Bank of Japan, Bank of England, and the European Central Bank are among those set to hold their monetary policy meetings this week with policy normalization measures expected to kick-start soon.
The two-day meeting of the US Fed, which begins on Wednesday, is expected to announce the tapering of its bond purchase programme, signalling the gradual end of low interest rates.
Typically, such a move leads investors to rush out of emerging markets such as India and pump more money into bonds when interest rates spike. This could spell trouble for the foreign institutional investors’ (FIIs’) capital that has supported a runaway rally in Indian markets this year. Already, FIIs have turned net sellers of Indian stocks since October, offloading equities worth more than $4 billion equities in the last three months.
Markets have been under pressure for three trading sessions in a row with investors staying cautious ahead of the US Fed meeting while keeping an eye on developments related to Omicron.
“In view of rising global inflation, the policy outcome of key central bank meetings especially the US Fed and European Central Bank will be keenly monitored by the markets to determine its trends," said Vinod Nair, head of research, Geojit Financial Services.
In November’s Federal Open Market Committee meeting, the Fed announced the beginning of the bond purchase taper, which at the time was scheduled to finish in June 2022. Since then, inflation in the US has surprised the Fed to the upside and public debate about inflation has been fever pitch.
Analysts, however, remain concerned about the possible threat to FII money into India.
Manishi Raychaudhuri, head, APAC Equity Research, BNP Paribas, said FII flows should be keenly watched in the event of divergent monetary policy trajectory. His analysis of four past episodes of similar monetary tightening and growth concerns showed a certain pattern of outflows from each Asian market as a proportion of their market caps. FII outflows from India ranged between 0.1% and 0.4% of the market’s total capitalization in each of these episodes.
“We apprehend that when taper actually picks up pace and rate tightening commences, Asean may bear the brunt of FII outflows. Considering the durations of the past episodes, we feel the first half of 2022 could be volatile in terms of FII flows and the second half should be more stable. Also, markets that are supported by strong domestic flows and especially where FII flows and DII flows counterbalance each other could be relatively insulated in a period of FII withdrawal. India, Indonesia, and Malaysia fall in that silo," Raychaudhuri said.
