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International brokerage Morgan Stanley has said that India will have to take strong domestic action to make up for the lack of liquidity now that America seems set to stop injecting cheap capital into the financial markets through its quantitative easing(QE) program.
“QE taper means that India did not get enough time to adjust its macro stability. Promptly, India needs serious domestic action. In our view, this action is to lift public savings and real rates (to boost household savings),” said Morgan Stanley’s India Strategy report authored by Ridham Desai, Sheela Rathi and Utkarsh Khandelwal.
“It is unlikely that the world’s reserve currency is returning to fund India’s deficit anytime soon – and hence, in that context, the deficit is now India’s problem,” added the report dated August 26.
The report noted that Indian equities had outperformed emerging markets in 2013 even after indications that the quantitative easing program would be wound down. It was only after the Reserve Bank of India indicated that it would also look to growth in its July 29 monetary policy that the rupee underperformed countries with a current account deficit.
The Indian equity market is likely to show lower correlation to other markets in the days ahead, suggested the report.
