Clipped from: https://www.thehindubusinessline.com/opinion/fed-tightens/article64942084.ece
It’s a new normal for markets and policymakers as global liquidity tightens and rates harden
Global financial markets are already beginning to heave. The MSCI World Equity Index is down 7 per cent since the beginning of this year with investors pulling money out of overheated stocks in all regions. Bond markets have also turned turbulent with 10-year US treasury security yield rising to 1.87 per cent, hardening 36 basis points over the past month. Sovereign bond yields in other countries are also rising as the world braces for the rate hike cycle to begin in the US. Institutional investors have begun reallocating funds out of risky assets such as emerging market equity, bonds and cryptocurrencies into safer havens of dollar denominated securities. This is causing currencies of emerging economies to weaken, further accelerating fund outflows.
Indian benchmark equity indices are down around 6 per cent from recent highs and 10-year government security yield has hardened over 40 basis points since December 2021. Policymakers will have to take the altered conditions in global financial markets into consideration going forward. . Foreign portfolio investors have turned net sellers this fiscal year, pulling out almost ₹45,000 crore while they had net purchased stocks worth ₹2,75,000 crore in FY21. This highlights the need to support domestic investor participation in equity markets to buttress prices in such times. Similarly, the Reserve Bank of India (RBI) needs to act fast to include government securities in the global bond indices so that the G-sec yields get some support at a time when FPIs pull money out of government bonds. Retail participation in government bond markets should also be promoted in order to create demand for these securities at a time when government borrowing is set to rise sharply. The forex reserves built over the last two years will be useful to support the currency if volatility increases. The RBI should keep up with its endeavour to add to its reserves in periods when foreign funds pour money into the country.Published on January 27, 2022COMMENTS
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