India Story - Just A Pipe Dream?

Past couple of days have been bad for Indian markets, equities have crashed and the currency is making a new low on daily basis. 

A little bit of context - it all started with the talks of tapering in US, which resulted into US yields moving higher. More than that, it also meant less free money to float around the world buying the risk assets, and led to outflows on funds from emerging market funds (both equity and bonds). Countries which have been financing their deficits from capital flows were ill-prepared for this, and have nose-dived. India is one of them, with over USD 180 billion of trade deficit (part funded by IT exports, part by NRI remittances, and remaining from capital borrowing), it was always going to be hit hard once the flows stopped. 

So, the pullout made FIIs sell bonds (more than USD 12 billion worth, out of total investments of USD 40 billion), and equities (little less at USD 2 billion, out of more than USD 100 billion). As a result, there was no way to match our deficits, and INR got killed, dropping a whopping 13-14% in little over 2 months. Post this crash, now anyone investing in India gets a slightly fairer deal with 10-year bonds at 9%+ yields, as against yields below 7.5% before this crash. For too long, we have been underpricing yields, and as a result overpricing equities, bonds, as well as real estate. As a result, investors were not compensated enough on their investments as yields were much below the inflation rate. Little wonder it made domestic savings move to gold and real estate. 

With recent RBI measures making funding more dearer, and now almost in line with inflation rate, makes financial assets a little more attractive. With most fixed deposits now yielding over 9%, may be its the right time to switch over to the INR bonds. FIIs outflows may continue for some more time, and can take INR to 65, but in the long term I believe the lesson has been learnt. We should see financial savings increase from here, and see some softening of real estate prices as well. For too long, we have had stimulus in the market, and it has created a huge bubble in everything, and making households save less and less. 

I will wait on the equities a little bit longer, as they may have another 5-10% fall coming soon. Expecting Nifty to test 5000 levels if it doesn't bounce back quickly from here. However, on the debt front, we may be closer to the bottom.