India to gain from divergent monetary policies across the globe

Improved macroeconomic parameters will sustain investor interest in India; higher interest rates in the US will not hinder capital flows

Four central banks in the developed world have decided to walk in different directions.

The  Bank of England and the US Federal Reserve are set to normalise their policy stance by rolling back their stimulus programmes. However, the Bank of Japan (BoJ) and the European  Central Bank (ECB) are going to deepen their stimulus programmes.

After coming together in the post-Lehman world (the events of end-2008) for a coordinated policy response, these developed economies are taking the divergent paths their economic situations and growth rates require at this point. Interestingly, this decoupling is unlikely to have a negative impact on emerging markets like India. It is thanks to this that financial markets did not react negatively even on the day the US Fed officially ended its massive stimulus programme last week.

As growth continues to be weak in Japan and the euro zone, both the ECB and BoJ are expected to continue buying sovereign and private assets across the globe, which means the world's financial markets will remain flush with funds. Kotak Institutional Equities says the balance sheet expansion by BoJ and ECB will be good for global liquidity. For, it would reduce fear in the markets about negative ramifications of an eventual turn in the US interest rate cycle.

Even if the rate cycle does turn in the US and interest rates inch up, history suggests capital flows into equities continues to remain strong in such cases. Foreign investors are unlikely to sell Indian bonds or equities, as India's macros have improved and so has the external situation. Saurabh Mukherjea of Ambit Capital says: "History suggests that rising US bond yields result in higher inflows into India because rising yields indicate an improving economy, which in turn leads to better economic prospects for India, alongside increased risk appetite."

Easy money is always good news for financial markets but herein also lies a risk. With Japan and some others rushing to devalue their respective currencies, some strategists are asking if this gush of easy money can find itself into commodities. If that happens, the bullishness around India's macros could disappear. Most believe  this is not likely yet, as growth in Europe and some other segments remains weak.

A bigger risk to India comes from a possible implosion in China. If Chinese growth starts falling, sharply or otherwise, the risk on trade might reverse. However, the impact of this might not lead to more than a 10 per cent correction in Indian equities.