Drown in Sensex... Well you need a short break...

Through the last quarter of 2007, India seemed to have “decoupled” from the US market. The mindless day to day correlation with the Dow and Nasdaq seemed to have been snapped. Sadly it wasn't an enduring decoupling as we seem to have recoupled again. We are back to the same old grind : eagerly waiting for global market cues every morning and promptly falling in line.

So is decoupling dead? Yes and no. First, even the staunchest proponents of decoupling would agree that it is wishful to expect emerging markets to not blink at all as the US economy faces up to the recession that the world has been fearing for the last one year. This is no empty debate now, nor a distant possibility : it seems to be right upon us. As the bad news gets worse, the bulls throw in the towel and hunker down for a rough patch, a last bit of capitulation always happens. While this capitulation plays out, some of the panic is bound to spill over to markets like ours. As may be happening now.

The important distinction is that this collateral damage is not necessarily economic in nature but in terms of sentiment and liquidity. On the margin, some institutions will sell stocks in all markets and raise cash. That may hurt us. This money will probably return later to chase growth in this part of the world, which is precisely when the decoupling will play out again. But that may have to wait for a bit, till our economic and corporate performance can establish that growth in India is not dependent on the US. And till the panic has subsided to the extent that global investors can think rationally and realise that they cannot take their money back to the "safety of their homes' as their home is where the fire rages.

So decoupling is not dead, merely interrupted or deferred. It's a matter of timing. If, indeed, the US has 2 or 3 quarters of negative growth, starting this quarter, my guess is that all global markets will move in a synchronised fashion for the first leg of that painful period. Then, markets like India and China (unless it starts tightening) will bottom out well before the rest and start outperforming. Decoupling, then, will be back, after a short break.