A shrinking global environment is posing issues for the Indian stock market. Market sustainability is being impacted by high inflation, bond yields, and geopolitical risks notwithstanding high valuations.
The stock market in India has had a lengthy journey. Throughout the current century, it has grown well and produced outstanding wealth. During the past 23 years, the Nifty 500, which is a more inclusive equity index, has delivered a respectable CAGR of 13.6%. Twenty-one lakh rupees would have been the value of a ₹1 lakh one-time investment in December 2000. Following a 7.25% decline on October 26 from the most recent intra-day high of 17,754.05, dated September 12, the Nifty 50 closed at 17,00095, 4.25% below its peak on November 3. a brief interruption in a market that has been expanding over time.
With its domestic economy now open to international trade, India saw itself at the beginning of the twenty-first century as a growing developing market. Since roads, electricity, and real estate are considered to be the cornerstones of the new economy, the initial focus was on developing these infrastructures. But it was also sometimes described as an elephant economy—one that was large and stable, mostly driven by domestic demand, and not quick to respond to opportunities presented by the global economy.
Since then, this calm view has changed, and the economy is now seen as a growing force that has the potential to eventually become a major global supply hub. Many industries, including digital, renewable energy, electronics, technology, pharmaceuticals, and chemicals, are experiencing the multiplier impact. Additionally, the effective use of government spending is increasing demand both domestically and in rural areas.
The fiscal and economic conditions in India are the best they have ever been. Even in the face of a slowing global economy, projections call for a steady 6.5% YoY GDP growth from FY24 to FY26 and a 5.25% budget deficit. The top 100 large cap estimations' PAT growth was up 35% year over year in H1FY24, indicating robust company earnings growth. Although there are no inherent structural problems in India, external events have caused stock market turbulence and consequent currency volatility. INR dropped in value relative to USD, closing on Friday at 83.270 from 82.140 at the end of March.
Global forces are the main cause of the current downturn in the Indian stock market. The recession in Europe, where Germany is the leading manufacturing base in the region, is a clear indication that the global economy is slowing down, as the country's GDP has been growing negatively for the last three quarters. China is no longer the engine of growth in Asia. Pre-covid annual GDP growth of 7% is expected to drop to 4.5% in the future. This is pushing the government to think about enacting a big stimulus plan in order to get everything back on track.
Two countries, the US and India, are distancing themselves in the midst of a shrinking world. The United States was predicted to go into recession in the latter half of 2023 in 2022; however, this scenario was avoided by the US thanks to the execution of an extensive $8 trillion COVID assistance package and fiscal and monetary stimulus measures that the government enacted between 2020 and 2023. These programs supported households, states, the healthcare industry, companies, and other institutions, among other far-reaching advantages. As a result, there is currently far less chance of a recession. Nonetheless, a deceleration is anticipated; the yearly GDP growth is projected to diminish from 2.3% in CY23 to 1% in CY24 due to the elevated fiscal deficit, interest rate hikes, and the US Federal Reserve's quantitative tightening.
The main problem with the global stock market and its effects on the global economy is this. The rising trajectory of the Indian stock market is in contrast to the current state of the global economy. Because of the strong FII sales over the past three to four months, holding onto the profits is getting harder. The market is not able to maintain a high momentum, even with the upbeat H1 outcomes.
Similar to the other indices, the Indian stock market has maintained a high valuation despite persistent economic imbalances such as high inflation, increased bond yields, geopolitical concerns, and supply restrictions. The MSCI India Index, for instance, has been trading at an average one-year forward P/E of 20.5x, which is higher than the long-term of 18x. With the bond yield trading at a decades-high 5% today, there is a dichotomy in relation to dollar terms at 19.6x. Since a slowdown in the economy and a moderation in future earnings are projected to require a consolidation in prices and valuations, FIIs are being cautious because interest rates are expected to remain high, in line with the hawkish central bank view.
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