In the last few days, while the market has recovered, analysts have ascribed various reasons to it. These range from the Infosys earnings guidance to a lower inflation number to short-covering.
While all these have undoubtedly played their part, the single biggest driver, probably, has been the resumption of liquidity flows to global equity markets. The dollars have started gushing in once again, and it's difficult to argue with the force of money.
Since the April 3, the day after the RBI-triggered selloff, India has received inflows of $2 billion, 700 million in cash and 1.3 billion in F&O. Does it surprise you that the Nifty is up 10 per cent, since then? This is not India-specific, it's a global phenomenon. In April so far, Taiwan, which saw an outflow of nearly 3 billion dollars in March, has taken in 2.2 billion. Korea has seen inflows of $2.1 billion, Thailand $231 million and so on.
The risk trade is back, in a big way. What has helped is that the yen has weakened from 116 to 119 to the US dollar, leading to a gleeful resumption of the fabled yen carry-trade. Global fund managers believe that the US economy will not throw up any nasty surprises, at least in the next couple of months, and it's probably a good idea to back risky asset classes again.
Not just equities, commodities as well. And it's pertinent to note that April has seen a very meaningful rally in commodities . The force of dollars again.
Liquidity is a big trigger for any market but it tends to be fickle. Any signs of rate hardening in the US led by inflation spikes there could lead to a reversal of liquidity. Any sudden downturn in US economic data may trigger a similar wave of risk aversion.
More fundamentally, growth prospects in most Asian emerging markets appear far better than the US. But it's debatable whether the global money is mature enough to bet on these fundamentals if and when things get hairy in the US. For the moment though, the dollar loves us and who's complaining?