As for the decoupling debate, a few days of brutal market activity was enough to turn the tide. The debate has now shifted from decoupling to coupling in a matter of days for India. Death to the decoupling debate came when the Fed in its latest policy meeting turned more hawkish with its forecast for much longer hikes in the coming months in its fight against inflation. After that meeting, global equities declined, treasury yields rose and the dollar index rose. The global recession did not overwhelm the Indian markets. The Fed scare had cut off around 4% from Nifty in few trading sessions with serious collateral damage to the currency and Gsec yield. The Indian Rupee breached the long-term support level of 80 to move near 82 and the ten-year Gsec yield rose over 15bps. With this, the decoupling debate has been put to rest.

Until this meeting, India stood out as an oasis in the desert as its markets moved up amid a global equity slump. As a result, Indian markets outperformed major indices worldwide. In the period between early August and mid-September (till September 16), Nifty rose over 2% while the MSCI EM index fell over 4.0%. That was an impressive outperformance of over 6%. Even against the MSCI World index, which was down over 4.9%, the outperformance was remarkable. Looking at another data point, from the June lows, Nifty was up over 11% (till mid-September) and Dow Jones was slightly negative. Globally, India was charting its own course amid the global recession.

What was happening?

Many have been quick to call India “decoupling” prematurely, rationalizing it on the ample ammunition coming from favorable geopolitics, tail winds from global supply chain diversification, turn of the profit cycle driven by domestic demand etc.

Down cycle or up cycle, it is usually the developed markets, esp. the US market sets the tone and the Emerging Markets (EMs) follow the course diligently. It is very unusual for any EM market to stand out and step out of this rhythm. This has also been the case for India in many cycles. It is hard for anyone to remember a single cycle in which he was otherwise. It was always one of the tight couplings with what was happening in the whole EM basket. But this cycle looked different. Although it was tightly coupled in the initial part of the current down cycle, since August, the Indian market seemed to step out to trace its own path, at least until mid-August.

Was this decoupling real or will the markets recover soon?

This was the question on the minds of many investors until last week. Now, as the clock turns to the end of September, it is no longer a debate. The markets seemed to have given a decisive verdict on this issue with Nifty catching up with the rest of the global markets in the slump.

What should investors do in these difficult times?

Investors need to maintain a balanced view during these turbulent times for the markets. While India’s macro is a relative sweet spot for global investors with an attractive growth cycle, stable forex reserves along with a better external debt profile (external dollar debt at 19.9% ​​of GDP and long-term papers at 80.4 % of total external debt. ), in the short term, it is difficult for any EM to stand out and enjoy the global linkages and spillover effects of FED tightening. So, when the global macros are in a difficult spot, it is not easy for any major economy to decoupling on a sustained basis.

From this perspective, investors are wise to expect short-term volatility, although India may continue to remain a relative sweet spot for global investors in the medium term from a political, geostrategic and market perspective . What it does ensure is that once the short-term volatility is digested and weathered, India could come back to outperform global and emerging markets. Due to this strong medium-term outlook, Investors should take advantage of short-term volatility and corrections if any to their advantage.

(The author,
ArunaGiri N is the Founder CEO & Fund Manager, TrustLine Holdings Pvt Ltd)



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