India could regain some of its safe-haven appeal among foreign investors if the global equity sell-off deepens, but high crude oil prices and limited real returns could delay a sustained recovery in overseas inflows, according to independent emerging markets commentator Geoffrey Dennis.
"There's a very good chance that if this sell-off continues, India will regain at least partially that safe-haven status," Dennis said in an interview with NDTV Profit.
India's relatively weak market performance this year could make it a more defensive option if equities in the US, South Korea and Taiwan face further pressure. However, Dennis said the country needs a catalyst to attract foreign capital, and the current environment offers little support.
"I don't think oil prices at $105 for Brent are going to be any sort of catalyst at all. In fact, it's negative," he said.
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High Oil Prices Could Delay Foreign Inflows
India's growth outlook remains attractive, but elevated crude prices pose a challenge for the country as a major oil importer. Dennis also pointed to the lack of positive real interest rates as a factor limiting its appeal to overseas investors.
Despite the Reserve Bank of India's move to raise interest rates, real rates are close to zero, he said. This leaves India at a disadvantage compared with markets such as Brazil, where interest rates are much higher.
Dennis said the rupee would need to stabilise and begin to appreciate to help draw foreign money back into Indian assets. Until then, the country's growth prospects alone may not be enough to trigger a sustained return of inflows.
US Inflation Puts Fed Rate Hikes Back In Focus
Dennis identified US inflation as the biggest risk for global markets, saying the prospect of further Federal Reserve rate increases was contributing to pressure on technology stocks and broader equities.
He cited US headline consumer price inflation of 3.7%, above the Fed's 2% target, and said another rate hike could come as early as October or by December.
"The Fed has got work to do here, and this is why the markets are reacting the way they are," Dennis said.
Higher oil prices, amid the conflict involving Iran and the effective closure of the Strait of Hormuz, have added to inflation concerns, he said.
Emerging-Market Rally Loses Momentum
Emerging markets' outperformance against developed markets has narrowed to just under 400 basis points from about 1,500 basis points a few weeks or months earlier, Dennis said.
South Korea and Taiwan accounted for all the gains in emerging-market indices this year, he said, leaving other markets weaker overall. A stronger dollar and the retreat in these two markets have since eroded some of the rally.
Dennis said he wanted to see performance broaden across emerging markets, pointing to Brazil and Central Europe as markets doing well.
He also flagged risks to AI companies borrowing to fund investment, but said financing pressures would depend more on long-term bond yields than short-term rates. Unless corporate bond markets sell off sharply, he said, the risk to these companies should not be overstated for now.
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