The Indian stock market, once the darling of global investors, is currently facing a prolonged slump that marks the longest string of monthly declines since the dawn of the 21st centuryBloomberg recently reported that since the end of September last year, over USD 19 billion has flown out of the Indian equity marketsThis withdrawal has led to what could potentially become the worst monthly downturn since 2001, as forecasts indicate that the growth rate of the Indian economy might plunge to its lowest point in four yearsCompounding this issue, the rupee has been depreciating, hitting recurring lows against the dollar, and prompting worries about the sustainability of India's economic growth.
This market downturn, coupled with the depreciation of the currency, has not only shaken the ambitions around the Indian stock market but has also sparked serious concerns regarding the broader economic landscape of the nation
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Chetan Seth, an equity strategist at Nomura Holdings, shared his observations on the situation, stating, "The fervor surrounding India is waning, and an increasing number of investors are raising hard questionsA necessary discussion on the health of the Indian story is now underway."
In recent years, India had emerged as a hotspot for global investors, fueled by a vibrant consumer market and a flurry of infrastructure projectsThe MSCI India Index soared to unprecedented heights, with the aggregate market capitalization of companies within the index rising nearly USD 2 trillion in just two years, culminating in a record high last SeptemberHowever, clear fractures in this growth narrative are becoming evident as high inflation dampens urban demand and limits the Reserve Bank of India's capacity to implement interest rate cutsEconomists predict that the current downturn in the stock market could have tangible repercussions on the Indian GDP, potentially causing a decline of up to 50 basis points in the first quarter
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Furthermore, the associated loss in wealth could lead to a further contraction in household consumption.
Since reaching its peak, India's NSE Nifty 50 index has suffered a decline of nearly 12%. It is poised to conclude its fourth consecutive month in the red, which would represent the longest monthly decline since 2001. Some investors trace the origins of this sell-off even earlier, to June of last year, when Prime Minister Modi's party was required to form a coalition government with other political partnersFaced with an economic slowdown, Modi shifted his focus to boosting consumption, which in turn obscured the outlook for critical infrastructure projects that were central to his economic agenda.
Today, policy directions have become a keystone influence on market dynamicsVarun Laijawalla, a fund manager at Ninety One Ltdin London, remarked, "A crucial factor affecting the market is how the policy environment is likely to evolve
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If the upcoming budget strategically reduces capital expenditures, it would certainly provoke a negative reaction."
Despite the overarching cloud of uncertainty surrounding economic expectations and external risks, domestic institutional and retail investors appear to remain optimisticIn just this month alone, they net purchased USD 8 billion in Indian equities, maintaining a trend of over USD 70 billion in net inflows throughout 2023. Some international investors also continue to express confidence in the long-term outlook for Indian stocksRita Tahilramani, a fund manager at abrdn Plc based in Singapore, stated, "We welcome the recent pullback and see it as a buying opportunity, as we maintain a positive long-term outlook."
Nevertheless, a significant portion of investors still contend that, despite the recent market retreat, Indian equities remain overvaluedAccording to Bloomberg's data, the anticipated future earnings yield for the Nifty 50 index is placed at 19 times, which is notably higher than other principal emerging market benchmarks across Asia
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Remarkably, at the end of September last year, this index’s earnings yield had exceeded 21 times.
Moreover, the challenges facing India are not limited to the domestic arena but are also compounded by international risksThe President of the United States has threatened to impose tariffs on India due to a trade surplus of USD 35 billionIn an attempt to appease the U.Sadministration, India has offered to accept 18,000 undocumented immigrants and is contemplating a reduction in import tariffs on American goods.
The prospects for economic growth appear grim, as a softening stock market has created a vicious cycleAnalysts note that declining stock prices often force companies to delay equity financing, which in turn postpones investments and ultimately detracts from economic growthInvestor confidence in a market recovery is becoming increasingly cautious, epitomized by Ygal Sebban, the investment director at GAM UK Ltd, who remarked, "We continue to hold a cautious view towards Indian stocks."
The sentiment on the ground reflects a broader unease among market participants
