Emerging markets like India would digest the liquidity tap turning. It will not go off in a hurry, it will not be done suddenly, nobody would want to disrupt the capital markets regulators and government but it will start turning for sure. How do you think we will adjust?
: It is a question which will get answered when it happens because in the last eight-nine years, there are very few instances where markets have been trading well or being buoyant when the monetary policy was either nonexistent, was an easy monetary policy or was working in reverse. For example, the 2013 taper tantrum had a huge effect in all global markets including emerging markets. In 2018, when the Fed started to taper and reduce its balance sheet size, it had an effect on all markets globally. So it is an open question.
I think the market will get volatile. There are no two ways about it. Right now, what is happening is the excess liquidity which was created and given to let us say markets and the economy by central banks and governments are probably going away. They are going to take away those crutches and ask the economy to run on its own. Most central banks will be a little cautious about removing the easy liquidity, the interbank liquidity services and at the same time raising rates.
I do not think they are going to do both the things together. It will take place in stages. They will remove liquidity first, probably adjust interest rate corridors. For example, our reverse repo is way too down. That corridor will get readjusted but interest rate hikes and hawkishness will wait. There is still time for that to come. Largely, markets will get volatile.
Secondly, we really do not know what kind of mechanism the market will follow when it has to function very normally without any central bank support. The short answer is that probably we will see corrections where valuations are rich and frothy. Where the market sees growth, those sectors will generally do better than others where valuations can be justified.
A big housing cycle is also unveiling and unravelling itself. Should we look at the bigger picture of where the property related stocks, cement stocks, housing finance companies can be in a three- to five-year period? A large part of them are saying they have already run up double, quadruple in many cases.
The Nifty real estate index shows that there is a huge rally but there is a big difference between the index today and the index of 2007-08 when it peaked out. The constituents are completely different. One can look at it from a longer term perspective but what I see is that ancillary plays in real estate will probably do better than headline numbers or headline stocks. So, one will have to go one level deeper to play this story.
Secondly, for the Indian economy to recover or to get a very strong growth footing, housing recovery is needed as it is a huge sector and employment generator. has been the biggest area . We see all the ingredients. Affordability has gone up and housing construction probably will come back as inventory goes down but one point is very clear that all ingredients are ready. All the economic metrics are intact and we have got a psychological trigger as well. So possibly this cycle has more legs and it will go on for a while.
Historically, we have seen that when inflation is a little higher than its long term averages, real estate does better than most other sectors and most other asset classes. So that play could also come about for India. But as a whole, it is a larger trend which we should be confidently playing through one level deeper space.
