Mumbai: With the Indian economy crossing the $1 trillion (Rs 41 lakh crore) mark on 25 April, the domestic stock market may be in for a rally this year if one goes simply by the experience of markets in economies that have crossed that psychological threshold.
Markets in eight out of 10 economies that crossed $1 trillion had a bull run for a year after crossing that landmark, says a recent report by Credit Suisse Research, the research arm of one of the large financial services group.
The Indian economy technically crossed the $1 trillion mark for the first time after the recent appreciation of the rupee, which pierced the Rs41 to a dollar mark to close at Rs40.91, its highest level in nine years. Since India’s growth is measured in rupee term, with the appreciation of the local unit, the level of gross domestic product, or GDP, the measure of an economy, automatically goes up, at least when the current foreign exchange rate is applied. The Reserve Bank of India, in its monetary policy document released on 24 April, said the country’s GDP, at current prices, was at 41 trillion, when measured in rupees, or above $1 trillion.
The broader stock market in the UK rose 78.4% in 1990 after the economy crossed the $1 trillion mark. Japanese markets rose 30.4% and German markets rose 37.4% in 1980 and 1987 respectively, after their economies joined the trillion-dollar club.
Although the Credit Suisse report is quick to point out that “there is nothing magical about $1 trillion mark” and it is “irrelevant for any fundamental analysis,” the resultant “hoopla” will add to investor sentiment, it says. “In a world of good-news-hungry politicians and media that shape the mood of multitudes of small investors at home and casual investors in distant lands, (crossing of $1 trillion mark is) unlikely to go unnoticed for long,” says the report.
Of course, when it comes to stock markets, past performance is no indicator of future performance and the Indian markets don’t have to mimic how other markets fared in the first year after their countries hit $1 trillion.
Moreover, the GDP of a country is the value of the record of goods and services produced over the year. In India’s case, it is Rs41 trillion for 2006-07, ending March. So if an average exchange rate for the year between the rupee and the dollar is applied, then it would be significantly lower than $1 trillion.
Indeed, despite noting the phenomena, Credit Suisse itself continues to maintain an “underweight” rating on India, which means that the Indian market is expected to under-perform other markets.
The Indian stock market capitalization too is very near the $1 trillion mark, at $944 billion. According to Credit Suisse estimates, if one were to take into account the market capitalization of companies listed on foreign stock exchanges but often considered a part of the Indian universe, and two foreign companies recently acquired by Indian majors, then the Indian market capitalization would stretch to $992 billion.
The list of Indian firms trading on foreign bourses includes companies such as Cognizant Technology Solutions and Rediff.com. Two foreign firms acquired by Indian comparies recently are steel major Corus in the UK and Novelis, a Canadian aluminum firm. “We would claim, given our outlook, that whatever the capitalization is today, it is likely to go down again in the near future before it sustainably stands above this ($1 trillion market capitalization) mark,” the report predicts.
Separately, credit rating agency Moody’s, in a report released on 25 April, also took a rather dim view of India’s further growth prospects due to lack of structural reforms and sees signs of “overheating” in the economy.
“The classic signs of an overheating economy increasingly visible in India can only be addressed through far-reaching structural reforms to boost productive capacity,” says a statement released by the interntaional rating agency.
Reacting to Indian central bank’s credit and monetary policy announced on 24 April, Moody’s vice-president Kristin Lindow said, “RBI’s tightening of monetary policy and gradual easing of capital account restrictions is appropriate even if it comes at the short-term cost of sacrificing economic growth. Over time, Moody’s anticipates a firmer supply-side policy response will underpin stronger medium-term growth, accompanied by less risk of overheating.”