November 13, 2015: Turbulence has returned to the financial markets with commodity prices plumbing new depths and worries over the US central bank action. While Indian equity markets do tend to gyrate with rest of the global markets in periods of intense risk aversion, investors in India have less to worry from global volatility now, compared to previous years.

This is due to the weakening link between the movement in Indian stock prices and other global markets. A correlation analysis between the movement of MSCI India and some of the other markets with which Indian equity enjoyed strong links in the past shows that this linkage has weakened significantly over the last three years.

Correlation depicts the strength in the relationship between two sets of variables that change together over a period. The values range from +1 to -1 with a value close to +1 indicating a greater linkage and vice-versa.

■Link with China weakens

The Indian equity market enjoyed a strong link with the Chinese equity market prior to 2011. Foreign investors flocked to both these countries due to their higher growth. The correlation between MSCI India and MSCI China moved between 0.86 and 0.98 between 2007 and 2011. But as China decided to peg back growth and re-balance its economy, Chinese stocks began correcting, making this link feeble.

The correlation between the two indices fell to 0.29 this year as fears of a yuan devaluation and slowing growth have resulted in a sharp correction in the Chinese stock market so far this year.

The trend is similar in connection with the BRICS markets. While the fortunes of the Indian equity market were closely linked to the BRICS group earlier, this too has changed. The poor performance of the Russian, Brazilian and South African markets due to the commodity melt-down has made investors move away from this investment theme. The linkage between MSCI India and MSCI BRIC has been less than 0.5 since 2012.

■India and the US

Since the linkage between China and India has grown weaker, is the Indian equity market now aligning itself with the US? No. The US equity market had been hitting new highs, led by technology stocks, even as other markets were in the doldrums.

It is therefore not surprising that the correlation between MSCI India and MSCI US was -0.19 in 2015. This means that the two markets were moving in opposite directions.

■Other Asian peers

The linkage of Indian equities with other Asian peers such as Indonesia and Thailand has, however, been stronger compared to other relationships in 2015, though it was lower than levels recorded between 2007 and 2008.