Guest Column: A K Sridhar, Chief Investment Officer IndiaFirst Life Insurance
The 2008 financial crisis and today’s situation are not the same as the recession was due to a major problem with US economy, the problem of sub-prime crisis. Today, the US economy is doing extremely well and the markets are at an all time high, albeit high valuations. The only macro issue of US to watch out for is the rising interest rates. However, the problem with the emerging markets like India is due to high current account deficit and high import dependence on crude, electronic goods and gold.
The US equity market valuations are stretched and the interest rates are also going up. But unlike 2008, today there apparently seems to be no major systemic issue in the US capital market.
In India, the problems are of bank’s non-performing assets and the power sector. India is far more integrated and dependent on global economy today than it was in 2008. Anything like high commodity prices and global trade wars do affect us, especially crude oil price. Having said that, the Indian equity market is no longer cheap as good companies are expensive and the reason for that is the money flow to domestic funds. We need to be watchful on the sustainability of domestic flows and domestic & US interest rate scenario.
Trade wars between two major economies are going to affect smooth/natural flow of money and trade. As far as currency depreciation is concerned, rupee has been very strong over the last four years barring the last eight months. Going forward, how much the rupee will fall further is a matter of complex macro factors and needs to be seen as to how it spans out.
In 2008, we did have monetary easing but in a different way we made money available. That was not rolled back quickly which caused problems in 2013. Demonetisation led to flow of money from the informal economy to formal banking channel and a part of it is finding its way into formal domestic financial markets. For example, flows into MFs in the recent 18 months.
Markets need to be cautious of what is happening around the world – commodity prices & interest rates. There is a need to reduce fiscal deficit, improve exports and contain imports, bring more of FDI and FPI money and also attract and retain NRI deposits.