India’s stock market has been on song, with the benchmark Sensex jumping nearly 80% since its 52-week low of 24 March. Morgan Stanley predicted the Sensex would top 50,000 by 2021-end. It has already kissed the 46,000-mark. Mint explores
What is driving India’s stock market rally?
The pandemic and the economic destruction it wrought prompted central banks to slash interest rates to record lows and institute accommodative monetary policies. A surfeit of liquidity has gushed into markets, sending equities to historic peaks. The economy has staged a revival from the abysmal 23.9% contraction in April-June and businesses are experiencing a faster-than-likely normalization. India’s national output this fiscal year may shrink less severely than initially feared. Reforms, vaccine hopes and better demand outlook have raised expectations that the bull-run may have more legs to stand on than just easy money.
Does the market’s run-up seem sustainable?
Many experts have warned there is a disconnect between the financial markets and the real economy. They say that cheaply-borrowed funds are chasing quick bucks, inflating asset prices. After all, India’s economy is still estimated to contract by 7.5% this year despite the strong recovery since the poor show in Q1. However, a revival is underway, which may accelerate, aided by a revival of capex plans as vast capacities created during our previous boom phase near exhaustion. The nature of the stock market is such that sentiments typically run ahead of fundamentals, but its signalling ability is beyond doubt.
Who all have been investing in the Indian equities?
Foreigners have been the mainstay of Indian equities market. So far this year, foreign portfolio investors (FPI) have poured ₹1.31 trillion into Indian equities. In November, they invested ₹60,358 crore, the highest-ever for a month. Besides FPIs, domestic institutions and retail investors have also participated in the post-lockdown rally.
How are stock markets faring elsewhere?
The Indian stock market has been moving in lockstep with global peers. For the first time in history, the market value of all listed shares in the world surged past the $100-trillion mark on 5 December, with major contributions from US and China. This represents a 63% rise from 24 March low of $61.6 trillion. The rally in US, which accounts for a 41.6% share in the global market-cap table, was mainly because of a surge in big-tech stocks. China is likely to be the only large economy to expand this year, potentially creating more upside for its stocks.
What are the likely headwinds?
The main concern revolves around inflation, which has been above RBI’s tolerance band for months now. If it stays elevated, RBI may not be able to cut rates next year to support growth. Also, covid needs to be tackled for businesses to resume operations fully. This can be achieved only if India is able to vaccinate a large number of its citizens and a fresh wave is controlled. A rise in interest rates in rich nations may lead to some unwinding of carry trades, where investors borrow cheap funds to plough in higher-return markets.
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