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Business News/ Markets / 'Volatility expected to stay high in Indian stock market ahead of elections 2024'
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'Volatility expected to stay high in Indian stock market ahead of elections 2024'

Despite challenges, the Indian stock market shows resilience, with Nifty50 above 22. Caution is advised, favoring quality large-cap stocks. Short-term volatility is expected with the upcoming election, said Vinod Nair of Geojit Financial Services.

Nifty50 has held above 22, mirroring the positive sentiment prevailing in the global market. Despite the broad-based recovery, caution is aired, and market participants are more inclined towards quality large-cap stocks, said Vinod NairPremium
Nifty50 has held above 22, mirroring the positive sentiment prevailing in the global market. Despite the broad-based recovery, caution is aired, and market participants are more inclined towards quality large-cap stocks, said Vinod Nair

The volatility of the Indian stock market has increased in the last month. It is a combination of both global and domestic factors. Globally, speculation surrounding the timing and magnitude of the season's first Fed rate cut, coupled with selling pressure from FIIs in emerging markets, plays a pivotal role. Domestically, factors such as Q3 results announcement, Budget implications, pre-election rally, and high level of margin trading contribute significantly to the heightened market fluctuations.

The RBI opted to keep the repo rate steady at 6.5%, with a focus on withdrawals of accommodation, thereby tempering anticipations of an early interest rate decrease. Optimistic projection of a robust 7% economic growth for FY25, driven by enhanced manufacturing, strong construction sector, and a gradual revival in rural areas did help the stock market. While lack of measures to increase the liquidity in the banking system impacted the stock market performance in between.

The market has overcome the challenges and returned to the new zone trajectory. Nifty50 has held above 22, mirroring the positive sentiment prevailing in the global market. Despite the broad-based recovery, caution is aired, and market participants are more inclined towards quality large-cap stocks owing to the prevailing valuation gap. Though, mid & small caps have outperformed in the last one month, the degree of outperformance has reduced. We prefer large caps as a medium-term investment pattern.

The interim budget had outlined measures designed to stimulate economic. There was a notable focus on infrastructure, although slightly lower than anticipated ( 11.11 lakh crore in FY25). Since 2014, the Government of India has accorded significant importance to infrastructural and developmental initiatives. The same is evident in sectors like cement, which have experienced steady growth over the past 5–6 years. In addition, future attention is directed towards green energy, renewables, and manufacturing. The key beneficiaries are likely to be electronic and electrical products, with a focus on mass production like exports. 

Beside infrastructure spending, the Production-Linked Incentive (PLI) schemes stand out as a pivotal initiative. These schemes are geared towards promoting domestic manufacturing, with the government aiming to allocate around Rs. 2 trillion in incentives. Currently, out of the targeted capital expenditure of Rs. 5 trillion, represents approximately 1.7% of the GDP for FY23. The government has garnered investment commitments totalling Rs. 3 trillion from 733 applicants.

The purpose of the PLI Schemes is to attract investments in key sectors and cutting-edge technology, ensure efficiency and bring economies of size and scale to the manufacturing sector, and make Indian companies and manufacturers globally competitive. Over the next five years, these schemes have the potential to substantially amplify production, job creation, and overall economic expansion. It is expected that these schemes will facilitate the creation of 6 million new jobs.

However, in the current short-term scenario, volatility is expected to rise as the upcoming major event of the election draws closer. India VIX index has increased to 15.2x from 13.5x month back. The ongoing robust pre-election rally, is forecasted to continue until the day of the election results, may take a breath. Corporate Q3 results are healthy and in-line with expectations nevertheless indicating a slowdown in earnings growth on a quarter-on-quarter basis. Similarly, the forecast for FY25 is moderate compared to FY23–24. The recent volatility in the global market has increased, mainly on speculation surrounding a possible US Fed rate cut in May. These factors will play a crucial role in determining domestic market movements in the short term, particularly given the high valuations.

The author, Vinod Nair is Head of Research at Geojit Financial Services

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 22 Feb 2024, 07:46 AM IST
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