After a great run in recent times, both NIFTY and Sensex fell last week. Indian Stock market became the 4th largest in the world overtaking Hong Kong in January 2024. Sensex and Nifty gained 17-18 % in the year 2023 crossing USD 4 trillion for the first time. Investors gained Indian stocks became one the most expensive in the world. Good GDP growth, inflation under control, sound policy measures, and a stable central government helped the Indian stock market in its growth. But the recent volatility in the stock markets have lefts the investors’ portfolio bleeding red. After the recent fall, everyone is asking, Is the bull run over? To answer this, we need to investigate the reasons behind this fall.
One of the reasons has been selling pressures from foreign firms. Structural adjustments of foreign portfolio funds as well as the activities of both FIIs and DIIs prevailing high have been fueling the volatility in the Indian markets. FIIs mainly offloading in Indian stocks, while DIIs became the net buyers, though the net purchases of both FIIs and DIIs in the month remain high at around Rs. 4,255.47 crore and Rs. 43,633.24 crore as on 21st March, 2024. Many of them have divested their Indian operations or are planning to do so. Rising valuations of Indian stocks led to these selling pressures. Whirlpool Corporation sold 30.4 million shares which is about 24% in the Indian unit for $468 million to pay off debts. Singapore Telecommunications (Singtel) sold 0.8% stake in Bharati Airtel to GQG partners for Rs. 5884.8 crores to raise funds for setting up their data centres. Seven overseas players have cut stakes in Indian units in recent times. It is a strategic sell by these companies. It however affected the Indian stock market adversely
Another reason for this sudden fall in the stock market had been the selling pressure from the small and mid-cap companies. Small-cap companies have a market capitalization of less than Rs, 5000 crores and mid-cap companies are between Rs. 5000 crore to Rs. 2000 crore. Investors prefer these stocks as they give big returns. The Security and Exchange Board of India (SEBI) has been worried in recent times about the possibility of the development of pockets of froth in the markets. There had been a surge in operator activity in the recent past, which had increased the value of fundamentally poor equities. The sentiment in these stocks have now become weak and these stocks are currently under pressure and giving negative returns. SEBI chief Madhabi Buch pointed out that these bubbles should not allowed to build as they can adversely impact investors. SEBI ordered Mutual Fund trustees to conduct stress tests and disclose the results once in every 15 days. Mutual funds will be assessed internally through stress tests if they can withstand sudden redemption pressures. Regulatory bodies are trying to remain vigilant to protect the investors. This sudden development may have led to the churn in the stock market. Global events like US PPA data have added to the negative sentiment in the market.
Additionally, speculations over US Federal rate policy also loomed over the Indian markets in the past few days. US Federal Reserve has still not cut the interest rates maintaining the status quo for the fifth consecutive term, though the signals of future rate cuts have boosted the market sentiments for the medium to long term. A calculated move by the Fed will be closely watched over, and a phased policy of lower interest rates will pave the way for more dollars entering the Indian markets.
Do we need to be worried? The answer is no. India is on a good growth trajectory. IMF considers India as one of the fastest-growing economies in the world. India is expected to grow at a 6% rate. Most of the credit-ratings for India have been stable due to strong growth prospects which outperforms the other peer emerging markets. A strong investment cycle is expected to be facilitated due to the strong regulatory measures, enhanced health of financial and banking sector and business balance sheets. Last year witnessed an impressive performance of the market after the slowdown in 2022 and there was a surge in the valuation of many small and mid-cap stocks which necessitated a correction now and is no abnormality. But since the fundamentals are good this correction goes a long way in driving medium to long term growth in the Indian economy.
Markets are likely to maintain their volatility till the election are over due to higher speculative activity and will start stabilizing after that. Global investors will also closely monitor the election situation in India and a continuation of economic reforms, infrastructure spending and a focus on green energy will open new opportunities for foreign and domestic firms to participate in the sector and drive the growth momentum. Till then, the investors are likely wait and watch the situation and enter at favorable entry points.
More foreign money should be drawn to Indian markets in the second half of the year if the country’s fundamentals for growth continue to be robust and are supported by the Federal Reserve’s favourable monetary easing. More funding to businesses in the form of FDI and FII inflows will ease the liquidity position and also drive the growth of the Indian industry. Some of this funding can also be expected to flow to the cash-strapped emerging start-ups in India, most of which have witnessed a plunge in funding in 2023. Foreign currency flows will also strengthen the Indian rupee and ease the pressure on current account due to lower oil import bills and debt servicing charges. Lower energy prices will also lessen the inflation in the Indian markets and affect the RBI’s policy on rate cuts.
The recent fall in the stock market does not impact its growth momentum. The market will bounce back quickly. The regulators will remain vigilant and take measures to protect the investors.
India has shown massive resilience and enormous development potential in the difficult global macroeconomic climate post the COVID crisis. This short term financial volatility and market correction does not hamper the long term growth prospects and India’s appeal as a worldwide market for investors will only grow due to its more benevolent business environment, expanding economy, demographic potential and expanded investment opportunities.
Dr. Sangita Dutta Gupta, Associate Professor and Assistant Dean-Research, BML Munjal University.
Dr. Juhee Singh, Assistant Professor, Food & Agribusiness Management, Prestige University, Indore.
