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Globalisation at work

The Indian financial sector's growing integration with the rest of the world is perhaps best illustrated by recent happenings in the domestic equity markets. Over last week (June 4 to June 8) the Sensex lost 500 points, its biggest drop in four months. While volatility in stock prices has become a fairly regular feature, what made last week's sharp decline noteworthy is that it is attributed almost entirely to developments abroad. However, while violent swings on previous occasions were caused solely by the actions of dominant foreign institutional investors, one ought to look for a more nuanced explanation this time around. What is significant is that FII actions in India are now seen to be part and parcel of their global strategy. The Indian growth story continues to be good and the corporates are posting excellent results. The threat of inflation, and with it the prospect of higher interest rates, is on the wane. If despite all this, the share indices went down sharply last week, explanations have to be sought elsewhere. Indian markets in the midst of a structural transformation are still grappling with the twin processes of economic liberalisation and globalisation.

Given that the pace of integration across the financial sector has been uneven, it is possible that happenings in a particular segment have an exaggerated impact elsewhere. Last week, share indices across the globe, not just in Asia, fell in response to conflicting interest rate signals emanating from the U.S. Federal Reserve. For many Asian countries, the United States remains the most important destination for their merchandise as well as investments. Interestingly, Indian markets too reacted along with the Asian counterparts. Some see in this the FII's changing vision of India and its financial markets. No longer are they seen as forming part of just another emerging market. The growing economy of India necessitates a much broader strategy that incorporates global developments. As if to prove the point, a report of Standard and Poor's ranks Indian equity market as the top performer among all global markets over a specified three-month period. As the Reserve Bank of India in a recent report has pointed out, Indian equity markets are still small in relation to those of advanced countries such as the U.S, United Kingdom, Australia, and Japan although bigger than those of many emerging economies including Brazil and China. Hence the FIIs who have invested around $4 billion in Indian equities will continue to have a disproportionately large say unless domestic financial institutions and mutual funds step in more aggressively.

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