The benchmark Sensex at the Bombay Stock Exchange closed on a 52-week high on Wednesday, and breached the 62,000 mark as worries over inflation and the global economy appeared to be waning. Is the time ripe for retail investors to seriously look at stock markets?
Where is the benchmark index now?
The Sensex has rallied 21.85 per cent from the 52-week low of 50,921.22 recorded on June 17 this year to hit a 52-week high of 61,952.67 on November 16. The NSE Nifty Index has risen 21.46 per cent to 18,442.15 from 15,183.40 since June this year. The Sensex closed at 61,750 on Thursday; the Nifty at 18,343.9.
The sharp revival in Indian markets has come despite persistent concerns over global growth for this year and the year ahead on account of the rise in interest rates.
“India is the only large market that has crossed previous record highs. This will stand the market in good stead. The sustained fall in US bond yields is a positive for emerging markets like India. The mid- and small-cap indices are likely to remain weak,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.
Why are the markets looking up?
Recent data on inflation in the US have offered some relief. October CPI inflation in the US softened to 7.7 per cent, lower than the market forecast, raising hopes that the Federal Reserve will have some room to lower the rate hikes going forward.
“Since inflation in the US is showing a moderating trend, dollar and US bond yields are declining. This means FPIs are likely to buy more in the coming days. Also, India has the best earnings growth outlook among large economies. However, valuations are getting stretched,” Vijayakumar said.
Retail inflation in India came down to 6.77 per cent in October from 7.4 per cent in September. Although it’s still well above the RBI’s comfort level of 4 per cent, analysts expect that the cooling might nudge the RBI to soften its rate hike plan.
“On the macroeconomic front, the US Fed rates, volatility in the prices of crude oil, fluctuating US bond yields and the dollar index played a pivotal role in driving investment sentiment,” Manoj Purohit, Partner & Leader – Financial Services Tax, BDO India, said.
Are FPIs back in India?
After pulling out over Rs 2.55 lakh crore from Indian equities between October 2021 and June 2022, foreign portfolio investors (FPIs) have started investing in Indian markets. August witnessed strong inflows of Rs 51,204 crore, but they pulled out in September and October. But in November, FPIs have pumped in Rs 28,762 crore into Indian stock markets so far, amid signs of a moderating trend in the US inflation and softening of the dollar.
The pullout by FPIs was a major concern for policy makers and the central bank as the rupee came under pressure, and the RBI was forced to use dollars from its forex kitty to stabilise the currency. If FPIs continue their investments in Indian markets — which is likely if US inflation comes down further and the Fed slows its rate hikes — it will bring more confidence among market players, an analyst said.
Singapore recently surpassed Mauritius to become the second biggest FPI investor in India. The US continues to be on top. “Another key reason why India is being considered a preferred destination for equity investments is the shift of a few large investments from China, which is facing some economic uncertainty. The volume of foreign fund inflows indicates that India is likely to be the preferred destination in the coming months as well,” Purohit said.
What role are domestic factors playing?
The RBI’s efforts to keep inflation trends in check, robust tax collections, and the rebound of domestic consumption to pre-pandemic levels have helped India, experts said.
A softening in US inflation and moderation in rate hikes by the Fed will not only ease the nerves of investors but will also provide a signal to central banks around the world, including in India. While it will take a couple of months to determine whether the decline in inflation is sustaining, the RBI will take cues from US inflation numbers along with domestic inflation trends before taking a call on future rate hikes. Expectations of stability in interest rates will lift consumer sentiment.
The next RBI policy review is due in the first week of December. “Better than expected earnings and comfortable macro numbers are positives for India compared to other emerging markets. I don’t expect any drastic movements in the market on either side for another couple of quarters. It is an ideal time for those who are looking at the medium to long term,” K Dileep, Head of PMS at Geojit Financial Services, said.
What should be the strategy of retail investors?
The sharp revival of over 21 per cent in the markets since June reflects optimism around India’s growth prospects, and underlines the strength of the country’s equity markets. It re-establishes the fact that in times of inflation, equities as an asset class outperform other investments.
When there are concerns around growth and markets are down, investors should not look at exiting, and should rather continue their investments. They should keep in mind that equities are investments for the long term, and if the long-term prospects of the Indian economy are bright, a decline in markets should only be taken as an opportunity to invest more.
While there are still concerns around inflation, and a hike in interest rates will impact the cost of capital and operations for companies, the fact that the Indian economy is expected to grow faster than other major economies in the world should be reasons to stay invested in India’s growth story.
Read More: Stock market back at 62,000: is the time right for investors?