The Indian stock markets emerged as an oasis of safety amidst the volatility of global financial markets in recent years, highlighted in a report by Anand Rathi, a financial service company.
The ongoing unwinding of the Yen carry trade, which historically influenced capital flows into emerging markets, raised concerns about potential impacts on the Indian equity market.
However, the report noted that India's robust financial regulations, prudent monetary policies, and strong domestic support systems positioned it as a resilient player in the face of such challenges.
"Domestic theme-related sectors, we believe, will continue to offer an oasis of safety. Therefore, even a complete unwinding of India's carry trade exposure is unlikely to significantly impact the Indian equity market over the long term" said the report.
The Yen-carry trade capitalised on Japan's low interest rates, allowing investors to borrow in Yen and invest in higher-yielding assets abroad. This strategy has led to significant capital inflows into emerging markets, including India, particularly during periods of low volatility.
However, the unwinding of these trades can lead to capital flight and market instability, as witnessed during the 2008 global financial crisis.
Despite the recent fluctuations in global markets, India has demonstrated remarkable resilience. The Reserve Bank of India (RBI) has implemented stringent regulations and maintained substantial foreign exchange reserves, currently standing at USD 671 billion. These measures have fortified the financial sector, making it less vulnerable to external shocks and capital outflows.
"India's financial sector has become more resilient over the past decade thanks to tighter regulations by the Reserve Bank of India (RBI)" said the report.
Moreover, India's macroeconomic indicators remain robust, with rapid corporate earnings growth and reasonable equity valuations. The report also highlighted that even in the face of USD 34 billion in outflows from Indian equities in the past years (from mid-July 2021 to mid-July 2022), the market has remained stable, buoyed by strong domestic support and continued inflows into mutual fund schemes.
"Despite a USD 34 billion outflow over 12 months, the Nifty rose 2.6 per cent, buoyed by strong fundamentals and robust domestic flows into the equity market" the report stated.
India's experience with the Yen carry trade imparted valuable lessons regarding the importance of effective regulation, prudent monetary policy, and diversification of capital sources. The country has made significant strides in these areas over the last decade, enhancing its economic stability and reducing vulnerability to external financial pressures.
"India has improved in these areas over the last decade, making it less vulnerable to Yen carry trade reversals. Even a complete unwinding of carry trade inflows is unlikely to significantly impact the Indian equity market due to strong domestic flows and positive fundamentals" said the report.
As global markets continue to experience turbulence, the report noted that India stands out as an oasis of safety.
The report also added that the combination of strong domestic flows, favourable macroeconomic conditions, and a resilient financial sector positions India well for future growth, even amidst the challenges posed by global financial dynamics.
According to the report, while the unwinding of the Yen carry trade may create short-term volatility, India's long-term outlook remains positive, supported by its robust fundamentals and strategic financial management. (ANI)
