Sri Lanka’s Economic Crisis: A lesson for policy makers

Question: How are foreign investors viewing India as a market currently? India has outperformed other stock indices since COVID, so do the foreign investors believe that this trend will continue or is there caution because they feel the market has run up too much?

So obviously you have such large inflows in the system and foreigners are bullish about India's prospects. I think what is interesting about India at the moment is that not only you have this IPO cycle, which is leading to a lot of inflows, but also the quality of foreign inflows has improved. It is slightly more longer-term money that is coming in and that naturally makes people look at India more seriously as an investment destination. Also, we've had very little impact from a growth perspective. While we did suffer quite a bit in the pandemic but the recovery in activity levels has been very quick. There's general optimism because of improved profitability. If you look at the PE Ratios, there are 2 ways in which high PE Ratios can be sustained - you have wildly optimistic assumptions that your prices are going to stay high but ultimately it is a call on your earnings as well. If earnings are increasing, then that can sustain higher valuations for a longer period of time. So profitability, as I said earlier, is improving despite all the challenges of high inflation. As long as that dynamic remains in place, I don't think one can really say that the markets are overvalued. If earnings are there, there is a reason why people would take that bet.

Question: Do you think that the current value in the markets is similar to the one we had in the 2005 to 2008 phase, or is this different?

I would say this is quite different because this time around, although optimism levels are there but the growth momentum is missing. There is a lot of anticipation of growth, but the growth is not there in actual. You need to come out of the pandemic and then reassess whether the growth momentum is sustaining itself. I think if that comes in, maybe we will be more lengths higher to market valuations than where we are already.

Question: Do you think the resurgence of cases in China & UK and lockdowns imposed in certain cities are a cause of concern for the global economy?

I would say it is a cause of concern in the sense that it can create these micro-air pockets in which supply bottlenecks can increase. Like if China shuts down a major port or you have a major congestion happening because there are no people to clear items, that does create a problem. Is it something that is affecting growth in a material way? Actually, the impact of these lockdowns is becoming less and less relevant and people have kind of figured out a way of working around them. So, we see a declining marginal impact of lockdowns on activity, but yes, it can create some issues now and then, depending on where and who is doing it. So if it happens in a major economy like China, it does create problems. But if it is happening in places which are economically not so relevant, then its impact is very miniscule.