The COVID-19 pandemic exposed India to the vicious cycle of fiscal expansion, central bank accommodation, unabated foreign portfolio money, and cheap systemic liquidity.
The situation is all-encompassing, given the multiplicity of economic cycles in India.
The primary reason behind this fragmented understanding is the fact that India has low capital market participation, and financial literacy, which is essential in the development of a mature capital market.
Traditionally, with its relatively small and protected capital market, India ensconced itself from the vagaries of global capital flows — never making a case for sentiment indexes.
While these limits restrict Indian capital market’s foreign exposure, there are considerable repercussions on the development of India’s currency as well as its overall derivatives market.
Nevertheless, as a systemically important economy, India’s weight in global capital movement will only rise, and restrictions will increasingly lose their importance.
The bank also estimates that there will be a spill over effect on other segments of the market, including sub investment grade as well as equity.
Given these, a sentiment index that can potentially read the market’s prevalent mood is a requirement.
Such a special purpose index is a need of the hour, and more such indexes can be developed as the market matures.
Managing over $496 billion in assets, the mutual fund industry’s growth has been a function of public trust, and the resultant access to savings, otherwise consumed or parked as fixed deposits with banks.
It is anybody’s guess that this is just a start, and that India’s steady economic rise will only bring in more capital from both domestic as well as foreign sources.