We have seen a significant shift in global fund flows from emerging markets like India to the US in the past few months. Here's why.
What is the reason behind this shift? Well, the basic reason for the reversal of flows to the US market has been the appreciation of the US dollar which in turn led to the depreciation in currencies like the Rupee. The dollar index has climbed by nine percent this year and the Dollar appreciation against the Rupee has been much more acute about eighteen percent.
So, what led to the dollar appreciation? Well, the reason behind the strong dollar pull was primarily a hawkish US Fed policy and strong domestic macro data from the US also contributed to the scenario.
The currency depreciation in emerging markets like India was also aided by the trade war initiated by the United States. This weighed on the growth outlook for many emerging markets. Latest PMI reports underline that business optimism has declined to its lowest in two years.
Well, the good news is that this trend may not last very long as the EM sell-off is overdone and far too indiscriminate. The fears surrounding EMs like Turkey and Argentina have morphed into concerns about a wider EM contagion which pushed down valuations across the board. However, the fundamentals of an EM-like India have been relatively better.
Moreover, in the upcoming US Midterm elections, there are high expectations of a divided Congress. This election outcome may finally put a halt to the 8-year dollar rally which in turn can provide some respite in portfolio outflows and can potentially lead to inflows, thus providing a relief to emerging markets like India.
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