The crash of the Indian Stock Market since January 2008 has been widely attributed to FIIs pulling their money out to meet liabilities and redemptions. According to this article, however, FIIs have only pulled out $12.7bn and still have another $53.7bn, or almost Rs. 270,000 Cr. left in the market. 

A lot of market experts are talking about the market being near the bottom (”Valuations just cannot get any cheaper! The Indian growth story is sound, even at 7%!”) Let’s be clear on this: these falling prices are not about fundamentals - its simply about lack of liquidity. FIIs are not exiting the market because they want to, but because they are being forced to - nobody wants to book such massive losses, and nobody would argue against the fact that as an emerging market India is looking pretty cheap.

The fact that there’s so much FII money still in the market - 80% - is quite scary Read the rest of this entry »

In many ways the US has recently been facing the kind of balance of payments problems which have been seen many times before, but most often in emerging economies.

For several years now, the US has run a large trade deficit by feeding domestic consumption with cheap imports from emerging economies, most notably China. The large flow of money out of the economy was offset by inward capital investment from Europe, Asia and the Middle East.

Since the credit crunch started to bite, the stability of the US financial system has been called into question by the failure of Bear Stearns and the public difficulties faced by Fannie Mae and Freddie Mac. Coupled with the Fed policy of cutting interest rates to fend off a recession and the gloomy consumer outlook underpinned by housing market instability, the US has become a much less attractive destination for international capital.

Along with low liquidity in global markets, the deteriorating attractiveness of the US has put pressure on the dollar to weaken to keep the money flowing in. These were the main factors behind the dollar hitting lows against the EUR, GBP and JPY in Q1 2008.

However the dollar has strengthened in Q2 and the beginning of Q3, largely due to the weakness of other developed economies; the Eurozone and the UK flirt dangerously with their own recessions and the outlook for the Japanese economy looks little better. Whether the dollar rally will continue depends largely on three factors; firstly, whether the Fed can maintain stability Read the rest of this entry »