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Now, that itself has its own ramifications. The yield on the risk-free rate for the world, which is the 10-year US bond, is now at 4.37. In fact, what we have been researching and flagging is that a lot of this 2% point increase in the 10-year bond yield in the US is something that is going to last for a while.
It is very difficult for that rate to come down. One very simple observation to support that is that one of the reasons the US fiscal deficit is so high is that their tax collections are not good enough. This means that some of the valuations that the markets have been used to and in the 10 years preceding COVID, where the US mostly had a tight fiscal loose monetary stance, and now they seem to have a tight monetary loose fiscal stance, will mean that the PE multiples that we are used to will not apply. The muscle memory of the market will be tested.
On the China side, if you peel one layer, the market has actually started feeling a bit more comfortable going by the last month’s data. In the last couple of weeks, we are seeing some recovery in demand. Even the August retail sales did slightly better than expected. The underlying trend is still very worrying, which is that they have to go back to the old strategy of triggering more or supporting more real estate construction, more infrastructure construction, whereas that only worsens the medium and long term.
So, the medium-term outlook for the world economy actually does not look very promising. Let me say that some of the risks we are talking about will likely play out over 12—24 months, and not 3 to 6 months. But these are things that we have to keep at the back of our mind.If your view is that next 12 to 18 months may not be all that sanguine for global economies, what does that mean for India, and the Indian financial markets?As much as we would like, we are not an island. Our interconnections with the world are much deeper than they were, say, 20 or 30 years back. We are getting more and more connected to the rest of the world. And therefore, there will be risks.There are risks of our services exports slowing down in the near term. As for the medium term, I am very positive and I think it is going to be a great growth story, a great growth driver over the next three to five years. But in the near term, I think there are risks to that. There is already visible risk. We are seeing goods exports slow down.
There is a very meaningful risk of the Chinese imports — or I would say the global goods — oversupply that results from firms having over-invested because of the price surge that we saw in 2021 and 2022 into capacities and now the global goods demand is running well below trend. That means that there is an oversupply of goods in the world.
And therefore, India’s manufacturing competitiveness will be tested and that will mean that we could see more and more imports starting to happen. And it would be unclear, at least for several months if not quarters, whether this requires import protection or duty protection.
These are the risks that I think we need to be wary of. It is when the loan rollovers in the US really start accelerating that the risk of failed loan rollovers starts to become meaningful. Around that time, I think there will be risk premium in the market.
Right now, volatility in the bond market, in the equity markets, is at very low levels. Therefore, people are speculating quite freely. But there are things that we have to keep at the back of our minds.