Insulated, but how much, for how long?

Of the three factors that contributed to last week's global market selloff, two have been in the making for some time. AI has been fuelling the market rally, and questions have persistently been asked about whether valuations have become unanchored from earnings. Chances of a soft landing for the US economy decline the longer the US Federal Reserve keeps interest rates high. Again, there have been persistent questions over whether the Fed has overshot. Collapse of the Japanese yen carry trade resulted from a relatively surprising move by the Bank of Japan to raise interest rates. Even then, the move was well-telegraphed. Yet, the markets reacted when the Japanese central bank delivered.

Data points that are feeding investor fears - lacklustre technology results, rise in US unemployment and an appreciating yen - are not unanticipated. However, they have crossed alarm thresholds on trading terminals. The market mood appears to have changed more than the fundamentals. The AI hype is a far cry from the dotcom bubble of yore, because it's being driven by some of the most-valued companies in the world. The Fed has signalled the end is in sight for its ultra-hawkish policy. The US economy is still some months away from a recession - if at all - and Fed chairman Jerome Powell has signalled interest rate cuts as early as next month. A reality check was overdue in a narrow market rally led by technology stocks. The markets now risk overdoing it.

The knock-on effects on Indian markets are limited by its exposure to technology and reduced dependence on foreign capital. Although Indian equity valuations appear stretched, they are consistent with earnings. Besides, India is now a significant contributor to global economic growth. These defences, though, may not be enough to keep contagion out. They should, however, offer some degree of immunity. It may well be a time to test the hypothesis that India is an island of calm in a turbulent sea.