Markets across the world are reacting to the 10-year US treasury bond yield breaching 5%, the first time since the global financial crisis. The US Federal Reserve has indicated its rate-tightening cycle may stretch further and emerging markets seem particularly vulnerable to a global flight to safety.
India, placed in the middle of the pack, will be affected in that eventuality. But the effects are likely to be less intense now. The Indian market has undergone several structural changes that should cushion it from capital flight.
Indian equity valuations are not extraordinarily stretched because of the economy’s class-leading growth. Early signs of a revival in investment point to the robustness of consumption recovery. Stock valuations are being propped up by increased flows of household savings into stocks, lessening the role of foreign portfolio investments in price determination.
Revenue buoyancy is keeping the fiscal position manageable with some leeway in the government’s borrowing calendar. Core inflation is on course to the policy comfort zone, and foreign exchange reserves are growing. RBI can guide the rupee to an orderly descent.
These guard rails may not be enough if energy costs were to spike again. Passing them on to consumers in the run-up to elections may be difficult and could strain the fisc. It would also affect the pace of monetary tightening that has so far accommodated episodic surges in food inflation.
Fragile rural consumption is also at risk from an energy shock, as is the current account in an environment of slowing world trade. All of these have a bearing on corporate profitability. But on current indications, it won’t be of an order to dislodge equity markets from their medium-term growth trend.
