The Indian capital market has received a thumbs-up from most global
investors who find the country's equity market quite well-regulated with
ample liquid stocks available.

Hence, it comes as no surprise that it seems to be the preferred route to
invest into India given the country's infrastructure constraints and
bureaucratic red tape make it difficult for FDI to come in more freely.

A JM Morgan Stanley report titled, 'Reflexity, India Style', highlights the
India interest and adds that the correlation between Indian equities and the
rest of the world's equity market has been witnessing a rise and any change
in global financial markets will impact the intensity of flows thereby
affecting share prices and growth.

"Indian equities are highly correlated to the rest of the world. In fact,
the correlation between Indian and global equities has risen more than most
emerging and Asian markets over the past four years. This rise in
correlation is driven by the balance sheet side of India's globalization
equation", notes the report.

It also stresses that Indian market performance has become more dependant on
FII flows. "Ever since 1993, when FIIs were first allowed to invest in
Indian equities, Indian market performance has become dependent on FII
flows", says the report.

Regarding the correlation between the equity market and the corporate
earnings, the report remarks that both appear to be reflexive in that they
are dependent on each other for performance. "The earnings outlook seemingly
improves with rising share prices and vice versa."

It also touches upon the issue of India's foreign trade, saying that the
country's foreign trade remains low relative to its output when compared to
other emerging and Asian economies. India's total goods traded as a
percentage of GDP stands at 35%, which is lower than countries like
Indonesia, Korea, Taiwan, Thailand, Hong Kong and Singapore. Even Sri Lanka,
Bangladesh and Vietnam have a better figure to boast.

As a word of advice for investors and corporates, the financial major opines
that "while the time to raise balance sheet leveraging may be behind us,
corporates may have to think about the appropriate balance sheet
capitalization (including actions such as increasing dividend payout, buying
back stock or altering liability maturities)".

This is because ROE (return on equity) may decline in the coming months and
it may not be a good time to hold over capitalized balance sheets. The
report maintaines that investors need to skew the beta in their portfolios
towards relative volatility rather than correlation.