India, US correlation weakens as equity markets take divergent path

Equity markets in India and the US have taken a divergent path over the past fortnight. The BSE Sensex has declined merely 2.5 per cent, even as the Dow Jones declined close to 8 per cent.

In July, the correlation-coefficient for both these markets had hit a 17-month high, signalling domestic stocks were marching in lockstep with their US peers.

During the first half of calendar year 2022, the Sensex had declined 9 per cent, while the Dow had declined 13 per cent.

Indian markets have withstood the latest global sell-off much better, triggered by the hawkish comments of US Federal Reserve Chair Jerome Powell at the Jackson Hole symposium.

One reason behind this, observe market players, is lower leveraged bets in India.

“In bearish times, when the buying interest is low, forced liquidation of leveraged positions creates havoc. The down-moves are exaggerated as we have seen in highly-leveraged markets like the US or even cryptocurrencies in the past 12 months. All regulatory changes in the past two years by the Securities and Exchange Board of India have reduced leverage. There hasn’t been an instance when our risk team had to square off positions of a large group of customers due to mark-to-market losses,” tweeted Nithin Kamath, founder and chief executive officer, Zerodha - India’s largest brokerage.