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For global investors with a low appetite for systemic risks, a recent paper by IMF may whet their appetite for Indian financial markets. In a policy paper on the global impact of Unconventional Monetary Policy (UMP), India ranks quite low in terms of impact on its domestic economy. In the continuing great recession that started with the sub-prime crisis in the US, central banks of the US, UK, Japan and the Eurozone, have followed UMP to kick-start the economy time and again. The recent IMF report studies the effect of UMP on a sample of 13 countries including India. Let me explain the rationale of the indicators used by IMF and how India fares in relation to other economies. The first indicator IMF uses is the effect on domestic bond markets to tapering announcements in the US. The Fed indicated in May and June this year that it is going to end the easy-money policy by scaling down bond purchases, widely known as Quantitative Easing (QE). The US has been printing money and buying back its own bonds thereby resulting in greater supply of dollars in the economy and its central bank hinted in May and June this year of tapering of the QE program. The study shows that our bond markets had the second-lowest impact of the 13 countries studied. As a by-product, IMF measured the net outflows from the domestic equity and bond market following the UMP tapering announcements in relation to other economies. There isn’t much evidence here either to suggest that there was much funds flow following the tapering announcements of the QE program. Another indicator is sensitivity of change in domestic bond yield to that of long-term US bond yield. The study reports a low correlation which indicates that our bond markets are not sensitive to external monetary shocks. More developed economies like Australia and Canada are more vulnerable to monetary shocks from UMP than India.
In terms of resilience in domestic market conditions, our economy fares quite well. India has a high market capitalisation to GDP ratio of 68.60%. An economy with a high market capitalisation like ours has less effect on asset prices from capital outflows. Moreover, Indian equity market has a high 54.63% turnover, a measure of the value of shares traded vis-à-vis average market capitalisation. With a relatively high turn-over, capital outflows tend to not have much effect on asset prices.