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The signals from soaring market capitalization

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Indian stock markets have rallied strongly since the worst days of the coronavirus outbreak, becoming the fifth largest contributor to global market capitalization with a share of 3.1%. Mint examines what this means and the signals it sends out about the Indian economy.

Indian stock markets have rallied strongly since the worst days of the coronavirus outbreak, becoming the fifth largest contributor to global market capitalization with a share of 3.1%. Mint examines what this means and the signals it sends out about the Indian economy.

What is market capitalization?

It is the total market value of a company’s outstanding share of stock, and is calculated by multiplying the total number of its outstanding shares by its current market price. Market cap refers to the firm’s worth as ascertained by the stock market, and helps the investor determine the returns and risks involved in investing in the shares of a particular company. Based on their market capitalization, firms are divided into large-cap (firms with a market cap of 20,000 crore or more), mid-cap (market cap of 5,000-20,000 crore) and small-cap firms. Those with larger market cap are considered as safer investments.

What has been the market cap trend?

After an initial pounding from the covid-19 pandemic, Indian stocks recovered quickly. According to Economic Survey 2020-21, India’s market cap to GDP ratio crossed 100% in 2020-21, the first time since October 2010. The country’s share in total value of global equities has rebounded sharply, and presently stands at 3.1% of the global markets. As per the MSCI Index which measures the performance of large and mid-cap segments and covers approximately 85% of Indian equities, the country has outperformed global markets, be it the MSCI World Index or the MSCI EM index.

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Where is India’s place among countries in the big league?

In terms of share in world market capitalization, India stands fifth. US tops the list with a market cap of $44.73 trillion, followed by China ($10.43 trillion), Japan ($5.5 trillion) and Hong Kong ($5.4 trillion). India entered the top five club in March 2022, and its current market cap is $3.2 trillion. Despite the outperformance, India still has a long way to go.

What are the key drivers behind this?

Despite steady withdrawals by foreign portfolio investors due to various factors such as higher interest rates in the US and a deteriorating geopolitical environment, domestic investors have played a key role in propping up the Indian market. Retail investors have put considerable faith in stocks, bringing stability to Indian equity markets. However, it is not clear if domestic institutional investors entered the market with the backing of equity research, or for the sake of keeping market sentiments high.

What do the market sentiments mean?

Capital markets are considered as a broad barometer of an economy and an indicator of what could lie ahead. Market surges are generally perceived to represent a booming economy while crashes could herald a downturn. While equities worldwide have witnessed huge volatility, India has largely remained resilient. However, it is important to note that market sentiments managed without rationale from any equity research may end up as a mere bubble.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

 

 

 

 

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