A day before Duvvuri Subbarao did it, Sakthi Siva and Kin Nang Chik saw it coming — like a myriad others.Only, the Credit Suisse analysts rushed to downgrade India, citing a tightening interest-rate scenario accompanied by valuations that are at a premium to other markets in the region.The move comes on the back of the Sensex falling 1351.26 points in a six-day losing streak before recovering 68.14 points over the last two sessions.It’s not India alone, though. The Morgan Stanley Capital International Emerging Markets Index has fallen more than 10% from its recent peak in just a matter of days on concern the economic recovery will falter as central banks raise interest rates.Investors are concerned that higher borrowing costs from China to India and Brazil will restrain economic recoveries that sparked a doubling in the MSCI index since October 2008.“The gravity and the speed of monetary tightening is in the limelight,” Roger Groebli, the head of financial market analysis at LGT Capital Management, said in a Bloomberg Television interview in Singapore.LGT Capital, part of a group that oversees about $84 billion, favours US and central European equities, Groebli said.Siva and Chik downgraded India based on expectations that the Reserve Bank of India would raise the cash reserve ratio (it did), hike taxes at the upcoming Union budget along with following a policy of fiscal tightening  and raise the more important reverse repo rate in March or April. Revisiting valuation models, they said while stocks in China are trading at a 25% discount to the region, India trades at a premium of 3%.Revisiting valuation models, they said while stocks in China are trading at a 25% discount to the region, India trades at a premium of 3%.“Although this is early-cycle tightening in India, India equities do not appear to be pricing in this risk,” Siva and Chik said. Markets are also pricing in earnings a full year ahead, others say.“The valuations at the current level are capturing earnings for FY11 and most large-caps are fully priced. If we stay above the 4900 mark, we could head for a sharper correction,” said D D Sharma, vice president, research at Anand Rathi Financial Services.Other negatives include a weak dollar and the unwinding of the dollar carry trade. Some FIIs, say marketmen, have been covering shorts built ahead of the monetary policy review in banking and real estate stocks, lifting their prices.But there is continued bearishness in the metals space, said a participant. Domestic institutions have also been shoring up on cash ahead of the flurry of divestments.“The hangover of PSU divestment means that there is a need to keep some capital among some domestic institutions. Domestic high networth individuals are also not too keen to buy at high levels,” said Anand Rathi’s Sharma.Others argue the premium afforded to India is justified and will probably stay over the longer term. “The premium is justified by the resilience India has shown during the global crises and India will continue to outperform. Other emerging markets too have their own issues such as the tax of foreign flows in Brazil or the Chinese tightening,” said Gopal Agarwal, head of equities at Mirae Asset Global Investments in India.China’s Shanghai Composite Index sank 1.6% on Monday to the lowest level since October. The benchmark measure has dropped 10% this year, the worst performer among 94 indexes tracked by Bloomberg globally.“The market is very worried about the outlook for economic recovery, because more tightening measures are expected from the government and that will risk damping growth,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co, which manages about $285 million.“Emerging economies are moving away from aggressive pro-growth policies,” Adrian Mowat, JPMorgan Chase & Co’s chief Asian and emerging-market strategist, wrote in a January 26 report.“Those asking about the start of emerging-market policy tightening are late; this has started.” 

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