Over the last 6 months India has seen a steady and definite improvement in its macro fundamentals. With a simple majority government coming to power, levels of uncertainity are significantly reduced and confidence is at an all time high domestically. There seems to be a confluence of local and global factors that are working in tandem. There is euphoria in the markets.Pockets of deep value in the mid and small cap space are fast vanishing/have vanished. Our portfolios have gained massively and are now reaping the benefits of our patience.

To us the major uncertainity ahead is the global situation and what will happen when US$ denominated debt yields begin to rise. The carry on trade which is borrowing in US$ and lending in for example INR is currently profitable even after hedging for forex risk. What will happen when this interest rate arbritrage opportunity shrinks ? Will liquidity shrink and asset prices crash ? Will there be a flight of capital away from the developing world in which India could also be caught ? We do not know. We now see a reason to reduce the levels of risk on our portfolios or at-least pause. While staying out of the market completely is ill advised, we believe we must have robust levels of liquidity and expose our portfolios to general (or index) linked market risk.

Touching about the dangers of making relative valuations in overheated markets, Mohamed El Erian makes an interesting point about how to guard against market shakeouts

A delightful speech by RBI Governor Raghuram Rajan, on why crony capitalism persists in India, and how financial inclusion will will help to relieve our country from this scourge