Understanding the Resilience of Indian Markets US Inflation Data
As US inflation data for August hit an unexpected high of 8.3%, the Dow Jones Industrial Average fell sharply by 3.94% on Tuesday, its worst drop since June 2020. Following this, Asian markets also came under pressure on Wednesday morning, and the Nikkei 225 in Japan fell 2.8%. But Indian markets, after falling nearly 2% at the open, quickly recovered – and closed with a marginal drop of 0.35%.
This is a rare case where an almost 4% drop in the benchmark in the United States had no or negligible impact on Indian markets and investor sentiment. Many in the investment industry see it as a reflection of India’s position in the world at a time when other major economies are facing serious challenges.
What makes Indian markets resilient?
First and foremost is the fact that inflation in the United States, which keeps its market in check, is based on factors that do not impact the Indian economy and markets. While inflation in the United States is driven by wages, which leads to an increase in the cost of services, it is not a factor in India. While inflation has led to higher interest rates and concerns about growth in the United States, many believe that lower growth in the United States, Europe and China is somehow good for India – this would cause commodity prices to fall. In addition, crude oil prices which are significantly hurting the Indian economy and markets (India imports about 85% of its oil needs) have, over the past two weeks, seen a slowdown; oil is currently trading at around $92 a barrel.
Second, foreign portfolio investors have returned to the Indian markets and have invested a net amount of Rs 68,957 crore since early July. Many believe this is likely to continue. REITs were heavy sellers between October 2021 and June 2022, when they sold Indian stocks net over Rs 2.55 lakh crore over the nine-month period.
The third factor highlighted by market participants is the fact that at a time when the world is experiencing turbulence and facing structural problems, India has emerged as the best place to invest both in terms of visibility of growth and political stability. Many say that the many measures that have been taken on the political front in recent years – PLIs, incentives for manufacturers, corporate tax cuts, etc. – provided a structural tailwind to the economy and gave confidence to domestic and global investors. .
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How have Indian markets fared vis-à-vis their global counterparts?
While US and European markets have suffered from growth and inflation issues over the past 10 weeks, Indian markets have benefited from global cash flows and the resilience of domestic investors who have held on to their investments and brought in new investments. As of July 1, India’s benchmark has been the best performing among the world’s key indexes.
The Sensex is up 13% since July 1; the only index that comes close is Brazil’s Bovespa, which rose 12.2% during this period. While the Dow Jones rose only 1.2%, the Shanghai Composite in China and the Hang Seng in Hong Kong fell 5.9% and 13.4% respectively. In Europe, the Dax rose only 1.7% over this period.
Net REIT inflows were robust, although inflation held above the RBI target; The RBI raised repo rates by 140 basis points and GDP growth projections were revised down by various agencies.
Are there any issues with this scenario?
While falling commodity prices have comforted investors parking their funds in India for now, a rise in crude oil prices could pose a challenge to the Indian economy and markets. Moreover, the Indian markets, due to the rally seen in the last three months, are trading at a high level, which poses a challenge when it comes to the valuation aspect.
However, the market feels that while these concerns may persist in the near term, India is well positioned for strong growth over the next 5-10 years, and investors should not worry too much about events ahead. short term and news feeds. . This is something REITs seem to follow, and domestic retail investors should too.
“It’s a cash-driven rally, but where will they (foreign investors) go? India seems to be the best place among major economies. Yes, India is expensive from a one-year perspective, but if you see from a five-year perspective, this is the place to be,” the CEO of a mutual fund said. foreground.
A senior executive at another mutual fund said that fund flows into Indian markets are now driven by the belief that India’s economy will double in the next 7-8 years. “India used to be part of the global emerging market basket, but now it has moved to a single country allocation. This is a big change,” he said.