4 Things To Understand About Market Decoupling

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  • 02 Feb 2023

As the world adjusts to the carnage in the stock market, you will often hear analysts and experts come up with theories on what happened. You will hear new terms and concepts. One such word associated with India is 'decoupling'.

Let's understand this theory.

  • What Is Decoupling?

In a globalised world like the one we live in currently, what happens in one part of the world affects countries all over. So, essentially all economies are connected. This is called 'coupling'. When one economy falters, it brings down overall world economic growth. However, there are countries which are shielded from such an effect. These economies do not grow or slow down in sync with the world. They are called 'decoupled' economies.

Markets are closely linked to economic growth. Markets are bullish when the economy booms, and fall when the economy falters. So, the world markets too inter-connected or 'coupled'. Any market that acts otherwise is called a 'decoupled' market.

  • So, How Do You Measure This?

There are three factors to keep in mind-economic growth, market trends and foreign flows. You can manually compare the data for these individual factors on a graph and observe the trends. Alternatively, you can also monitor a market measure called 'Correlation'. As the name suggests, it measures how closely inter-linked two markets are. Correlation is written as a single digit figure ranging between +1 and -1. Positive correlation means the two markets move in the same direction-up or down. Negative means the two markets move in opposing directions-when one moves up, the other is down. The number, meanwhile, denotes the strength of this correlation. Bigger the number, greater is the sync between the two markets.

Is India 'Decoupled'?

The answer to this question is not simple. Some agree that the Indian economy may have decoupled with the world. This is because the economy is predominantly dependent on factors like how Indians buy goods and services, and how companies invest and expand. These are 'Indian' factors-unique to the country, and not dependent on the world. However, many believe India has not exactly 'decoupled' altogether; just look at how the BSE Sensex slumped nearly 1,500 points on Monday when the world markets crashed. The Indian economy does depend on factors like rupee exchange rate and global commodity prices. This has a big impact on India's inflation-the rise in prices over time. A high inflation can cause consumers to cut spending. This then affects growth. So, India may be less affected by world economic trends, but it is certainly not completely shielded too.

What Is In India's Favour?

Rewind back to 2013 and you will remember how the rupee crashed to near Rs 70/$ levels. Today, however, the impact is muted in comparison. In fact, India is considered a favourite investment destination. This is why foreign investors infused $5.8 billion in global funds that invest in India in YTD 2015, according to a report by Kotak Securities. At the same time, they pulled out $20 billion from funds which invest in emerging markets. This is because of three key growth-related factors-inflation, current account deficit and fiscal deficit. All the three problematic factors are under control in India today, unlike 2013. This allows great scope for the economy to prosper. "We assess India's economic strength as 'High' relative to all other sovereigns we rate," credit rating agency Moody's said in its note.

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