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The flow of positive data from the US continues unabated. The world’s largest economy grew at an annualised rate of 3.6 per cent in the third quarter of the calendar year, ahead of advance estimates of 2.8 per cent. In the second quarter, the US economy had grown by 2.5 per cent. While economists say most of the gains have been driven by inventory investment by the private sector, business confidence is certainly much better now and non-farm jobs data is also expected to reflect this. Even though private consumption and home sales have slowed sequentially, the overall uptick in growth and better-than-expected jobs data could lead to the US Federal Reserve looking at cutting back its bond purchase programme, also known as quantitative easing, earlier than expected.
Less than six months ago, even a whiff of positive data from the US would have sent emerging markets into a tizzy; however, interestingly, this isn’t happening now. For starters, the surge in US treasury yields, which had triggered the massive sell-off in emerging market bonds, is not likely to happen again. With interest rates remaining low in the US even if bond purchases slow, the case for emerging market bonds remains. Economists believe that global investors will look at stable, rather than higher, returns in 2014; this means, there may not be a repeat of the knee-jerk reaction seen in the summer of 2013.
Other than global factors, there are enough domestic triggers, which suggest India may not be as badly affected by the spectre of the infamous “taper” as many feared. A number of domestic factors have also helped improve India’s external situation. The current account deficit during the quarter ended September has narrowed to $5.2 billion, compared to the $21.8 billion at the end of the quarter ended June. While imports have fallen, exports have picked up meaningfully. And even though portfolio flows during the second quarter remained negative, foreign direct investment at $6.9 billion was higher than the $6.5 billion witnessed in the first quarter of the year.
With trade deficit narrowing to its lowest in two years, economists believe that the external conditions are markedly better than they were six months ago. However, the belief is that conditions will continue to improve going forward. Also, portfolio flows into India have picked up substantially from September onwards, which will help finance the deficit. However, India’s policy makers cannot rest on their laurels, says Leif Eskesen, chief economist for India and Asean, HSBC Global Research. With the current account deficit widening again in October, India needs to continue to act on reforms so that capital flows don’t dry up.
