Decoupling

Decoupling

Subject: Economy

Context:

Sustained decline in a few major markets will most likely pressure domestic markets sooner or later. Thus, the theory of India’s decoupling from the global market can be a myth.

Details:

• Indian stocks have outperformed overseas markets for a couple of months, this gives the impression that the Indian market may have decoupled from global markets.
• However, the past indicates India did outperform global indices in1999 and 2007, but bears caught up in the post 2000 and 2008 crisis.

Issue:

• Higher energy price challenge-severe repercussions for India’s balance of payments.
• Overseas recession risk -on the backdrop of monetary policy tightening in the USA and Europe.
  • The Indian economy is too interlinked with the global economy

Concept:

Coupling vs Decoupling:

• In a globalised world, one part of the world affects countries all over. So, essentially all economies are connected. This is called ‘coupling’. 
  • When one economy collapses, it brings down overall world economic growth. The world markets that are too inter-connected  are called  ‘coupled economies’.
  • However, there are countries which are shielded from such an effect. These economies do not grow or slow down in sync with the world. They are called ‘decoupled’ economies.
• Decoupling and coupling during financial crises is typified by the decoupling hypothesis that, in 2007, held that Latin American and Asian economies, especially emerging ones, had broadened and deepened to the point that they no longer depended on the United States economy for growth, leaving them insulated from a slowdown there, even a fully fledged recession.

Decoupling other aspects:

• In financial markets, decoupling occurs when the returns of one asset class diverge from their expected or normal pattern of correlation with others.
  • Example- Decoupling would happen if oil moves in one direction while natural gas moves in the opposite direction.
• In economics and environmentalism, decoupling happens when an economy is able to grow without causing more environmental pressure or damage. Such a type of decoupling is known as eco-economic decoupling.
• Decoupling also refers to the gaps between formal policies and actual practices in organizations. It may result from a conflict of interest.