Is India Sitting On A Razor's Edge?

Jan. 05, 2013 11:28 AM ETINDY, INP19 Comments
Macro Economist profile picture
Macro Economist

The Indian stock market has had an incredible run as of late, up over 25% in the past 7 months. But under the hood, all may not be well, and India has the makings of a country heading toward its worst crisis since former Finance Minster (now Prime Minister) Manmohan Singh's early 1990's economic liberalization ushered two decades of prosperity.

Technically speaking, despite the sharp rally, India remains in a longer-term downtrend against Emerging Markets as a whole. Why are we seeing this?

First, India has faced a pervasive inflation problem since strong inflationary pressures hit the Rupee during the global slowdown of 2011, forcing a tight monetary policy regime by the Reserve Bank of India. One of the reasons for the market rally has been the belief that inflation has been tamed in India. At first glance this appears to be so.

Figure: India Wholesale Inflation YoY

Short-term bond markets are also signaling further monetary easing, which of course has lathered up the bulls.

Figure: INR 3 month T-Bill

What makes India ripe as a short is its continued reliance for foreign capital. This factor has actually gotten worse since the mini crisis in 2011. India is the quintessential poster boy for hot money flows by global investors. When investors are starved for yield, as they are now, high-yielding countries like India benefit. But when the money comes out, countries that require outside capital have little to no defense. Remember Iceland?

Figure: India Current Account Deficit

Every trade needs a catalyst. With India, it's going to be an increase in inflation expectations, which would likely need to be catalyzed by strong economic growth, an increase in inflation expectations - or both. Admittedly, just looking at the CRB index as an inflation proxy, we don't have that yet, but we also no longer have systemic bleeding as

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Macro Economist profile picture
I am a 15 year veteran of the buy-side, with over a decade of experience in Investment Management, at one time overseeing several billion dollars in hedge fund assets for institutional clients. Currently, I advise wealthy families on their investment portfolios as well as trade my own money. Articles on Seeking Alpha are meant to be a snapshot of my views, but do not necessarily always reflect my portfolio. I also try to write on controversial and contrarian topics.All money received from Seeking Alpha activities is currently being donated to various charities, including the World Food Program and UNICEF.

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