In the financial or investment, often there exists correlation i.e. there is a likelihood that returns from two assets move in the same direction at the same time but when it does not happens. This is what is referred to as the state of market decoupling. For instance: decoupling situation arises when while stocks are to increase in price, bond yield is on the downward side i.e. declining.
Market decoupling in a broader sense
In a broader sense, when some of the economies share coupling with other economies i.e. move in growth depending on the larger world they are said to be coupled. While any market that acts otherwise is referred as a decoupled market.
How to evaluate market decoupling for a particular economy?
Correlation helps in examining the extent to which the two markets are interlinked. And for it, you need to study some of the key factors including economic growth, market trends as well as foreign flows. It's a single digit number between +1 and -1.
A positive correlation indicates that the two markets move up or down at the same time. And higher the number; more is the connection between the two markets. And if the correlation is negative, it is reflective of the fact that the two markets move in the opposite direction.
Is the Indian economy decoupled?
While some of the opinions confer that Indian economy does not depend on the whole of the world as a lot of Indian factors unique to the country determine its growth, nonetheless it is not altogether decoupled as any surge in global crude oil prices directly casts an impact on Indian markets and currency. After a heavy foreign fund flow in the month of March, FIIs pulled a staggering amount as and when nervousness around the elections swayed the markets.
So, in an overall scenario, our country is not completely immune to the factors percolating worldwide. Sharp rise or fall has been witnessed in Indian equities in events such as when the US-China trade tensions deepened in a recent scenario.
Given the current situation wherein India is close to see which party comes to power next, there has been extreme nervousness and markets have shown huge decoupling from the world markets with Indian markets volatility index going higher. But as per one of the analysts at Merill Lynch this is normal in the wake of federal elections.