Emerging markets including India better prepared to face any external shocks from taper tantrum: RBI

Foreign institutional investors (FIIs) turn net sellers in October on rising fears of taper tantrum from the US, but Emerging Market Equities (EMEs) now look better placed to handle any external shocks, central bank economists said in their latest report on the state of the economy.

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The Indian equity markets scaled record highs multiple times during the first half of October 2021, buoyed by strengthening signs of recovery in economic activity, a strong demand outlook ahead of the festive season and the Reserve Bank’s announcement of the status quo in its policy repo rate alongside continued accommodative stance of monetary policy.

Despite the strong rally seen in the markets, FIIs remain net sellers in the domestic equity market in October, though they remained net purchasers in the debt market in contrast to their EME peers.

Net disbursements of external commercial borrowings (ECB) to India remained strong in September 2021. Foreign exchange reserves stood at US$ 640.9 billion on November 5, 2021, providing a cover equivalent to 14 months of imports projected for 2021-22, said the RBI report.

Scaling back of pandemic-related stimulus programme amidst uncertainty over persistent inflationary pressures in AEs, particularly the US, have reignited some fears of taper tantrum.

“Major EMEs are better prepared this time to face any external shocks due to low current account deficits, crude oil prices. This was reflected in the movement of the INR in terms of the 40-currency real effective exchange rate (REER) index, which depreciated by 0.1 per cent over its level a month ago,” the monthly bulletin said.

Stretched Valuations:

The Indian equity market has outperformed major equity indices in 2021 so far. Benchmark indices have rallied by about 30 per cent so far in the year 2021.

The spectacular gains have raised concerns over overstretched valuations with a number of global financial service firms turning cautious on Indian equities, said the note.

The markets, however, pared some of the gains in the second half of the month amidst accelerated profit bookings following mixed Q2 corporate earnings results and concerns over stretched valuations.

Traditional valuation metrics like price-to-book value ratio, price-to-earnings ratio and market capitalisation to GDP ratio stayed above their historical averages, highlighted the RBI note.

“The yield gap (difference between 10-year G-sec yield and 12-month forward earnings yield of BSE Sensex) at 2.47 per cent has far outstripped its historical long-term average of 1.65 per cent,” highlighted the report.

Not just RBI, but experts also advise caution as benchmark indices trade near unchartered territory amid improved earnings growth, fall in COVID cases, and reopening of the economy.

“The Indian markets have been one of the best performers this year and currently have rich multiples as well. With initial euphoria and improved earnings on the back of re-opening post Covid lockdown, investors have started taking a more balanced view on the markets and hence, the higher multiples and strong performance of markets are making them cautious,” Rishi Kohli, Managing Director and CIO - Quant Strategies, Avendus Capital Public Markets Alternate Strategies, said.

“The tapering has begun and rate hikes are bound to happen sooner or later. Therefore, some bit of caution is warranted from a short-term perspective. Markets could see some decent decline at some point in the next 3-6 months based on some very rare and long-term quant signals that we have got,” he said.

Kohli further added that the Indian market seem to have embarked on a multi-year bull run from November 2020 so, we are only 1-year old into this 5-6 years secular rally. Hence, by being cautious in the near term, one also needs to keep plans and dry powder ready to buy into that decline for this multi-year bull run.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)