It's common knowledge that interest rates at the long end of the US market give valuable clues about what is likely to happen to equities globally. Last week, US 10-year bond yields touched 4.74 per cent, their highest since June 2004. That was enough to shake global markets, and the 200-plus point fall in the sensex was part and parcel of a sharp correction in equities globally. In fact, other markets fell far more sharply than the sensex, with markets in Russia, Turkey and Brazil being particularly hard hit. Stocks have corrected sharply during every episode when fears about rising US long-term interest rates have been raised. The last time it happened was in October 2005.

As BCA Research points out, ?Upside risks to bond yields pose a short-run threat to global equities,? although they remain upbeat about equities over a 6-12 months timeframe. This time, however, the correction has been short-lived, with the sensex reaching new highs on Friday and other markets too clawing back some of their losses.

It's easy to see why higher long-term US interest rates pose a threat. The current three-year global boom in asset prices has been based on low US long-term rates, which has sustained the housing boom in the US. In turn, it has buoyed the American consumer and led to the resurgence of the Asian economies on the back of growth in exports to the US. The markets get spooked whenever they start worrying that something could disturb this equilibrium.

Seen from this perspective, explanations that relate the nervousness in the Indian market to its overvaluation appear misplaced.

For if overvaluation is the reason for the fall, why did other, more reasonably priced markets also fall, some of them much more sharply than the sensex?

As a matter of fact, a look at the MSCI indices shows that the Indian market is one of the very few that continues to be in positive territory this month. As on March 10, the MSCI Emerging Markets index was down 2.95 per cent from the beginning of the month, while the MSCI India index is up 5.5 per cent this month. Among the major emerging market indices, only Venezuela, Indonesia and Argentina have kept India company in the positive territory this month.

Clearly, the Indian market, despite its widely perceived overvaluation, has done better than most.

One reason for beating the global benchmarks is because domestic mutual funds are raking in money, with new fund offerings having collected very large amounts in the last couple of months. All that money is flowing into the market. Till March 9, while net FII inflows into the cash market amounted to Rs 2,627 crore, mutual funds pumped in Rs 1,181 crore. That doesn't include the money flowing in through portfolio management schemes. So even if FII flows dwindle, which is not happening at the moment, the cushion from domestic fund flows is available.

Then there?s the other beguiling theory put forward by proponents like investment guru Marc Faber that India has become a separate asset class which everyone wants a piece of.

Close-ended India-specific funds like the India Fund and the Morgan Stanley India Investment Fund are trading at a substantial premium to NAV. That could explain the relative resilience of the Indian market compared to other emerging markets. That doesn?t mean, however, that when global liquidity dries up the Indian market won?t be affected.