Safety in the storm

As the requirement for capital import into India at present is low, the global tornado has modest implications for us

- AJAY SHAH

Volatility in global financial markets has surged. There are well-known channels through which this influences cross-border capital flows. However, the exposure of the Indian economy is relatively small because the requirement for capital import the gap between investment and savings-is modest.

On February 6 in Business Standard, I wrote "Uncertainty has declined", pointing to the fact that the volatility index (VIX) and Merrill Lynch Option Volatility Estimate (MOVE) were at low values compared with those seen in the year following February 2022, where Russian President Vladimir Putin invaded Ukraine and the US Federal Reserve started hiking rates, at which time the world looked quite uncertain. The world economy got its next air pocket last week. The VIX rose from 19 on February 6 to 26 on Saturday, and MOVE went up from 100 to 180 in the same period.

This is, of course, a more stressed global financial environment. To add to the problems, in these difficult times, developed market (DM) central banks continue to raise rates. This combination (high DM interest rates plus high risk) is one in which global investors (e.g. Indian households) like to hold more DM assets. In 2022, we saw how effervescence around start-ups and initial public offerings in India, and other illiquid risky assets, became more subdued. We will see more of that in coming weeks.

But there is one respect in which the present state of the Indian economy creates a comfortable situation: This is a low scale of requirement for capital import.