The new year has begun amid positive signals for the stock markets, and investors are optimistic. The markets expect India’s robust macro fundamentals and strong corporate earnings delivery to override geopolitical risks and inflation worries — and perhaps repeat the performance of 2023 when the Nifty gained 20% to hit an all-time peak of 21,834.35, and the Sensex hit a high of 72,561.91.
Should the Sensex gain 20% in 2024, it will cross 86,000 by the time the year ends. Could it happen?
Actions of the Federal Reserve will be a key driver for the Indian stock markets. The US central bank foresees three quarter-point cuts to the benchmark interest rate. A fall in the interest rate in the US means foreign investors will pump money into emerging markets like India. Foreign Portfolio Investors (FPIs) made a major comeback to India in December, even though the current rally is riding on retail investor sentiment.
Significantly, the yield on benchmark US bonds has fallen from a high of 5% in 2023 to 3.9% now, indicating that inflation could have peaked and interest rates are likely to come down. Indian inflation and interest rates normally move in tandem with the US rates.
Economy in good shape
India’s robust macro fundamentals and strong corporate earnings delivery position it at an advantage over other major economies. “The fiscal policy of the government remains the key driver for growth in 2024, as financial conditions remain tighter than normal. Previous measures…by the government including greater public capex spend, long-standing reforms related to taxation and labour, and providing incentives to boost manufacturing and infrastructure, is likely to boost India’s medium-term growth outlook,” Standard Chartered said in a report.
Analysts expect domestic growth in the first half of 2024 to be boosted by an acceleration in consumption demand through election-related spending. Investment growth could pick-up in H2 2024 with an acceleration in private spending as the new government’s policy priorities become apparent.
In addition, given India’s large domestic growth base and improving external position, its economy is relatively less exposed to global macro risks emanating from slower global growth, still elevated interest rates, and greater geopolitical uncertainty, the Standard Chartered report said.
Inflation, interest rates
The Indian economy will grow by a robust 7.3% in the 2023-24 fiscal against 7.2% a year ago, the National Statistical Office (NSO) said in its First Advance Estimates of national income released on Friday. With a better-than-expected second-quarter gross domestic product (GDP) print at 7.6%, the RBI had earlier revised its growth estimate for FY2024 upwards to 7% — the fastest among major economies — from 6.5%, and kept the inflation estimate for the fiscal unchanged at 5.4%.
“As we embark on 2024, there are green shoots in the form of continued corporate earnings momentum domestically, healthy GDP growth, benign commodity prices outlook as well as likely rate cut globally. Thus, there seem to be more positives than negatives ahead. India is in a sweet spot vis-à-vis global peers with macroeconomic stability and corporate earnings in sight,” Pankaj Pandey, Head-Research, ICICIDirect, said.
Trideep Bhattacharya, CIO-Equities, Edelweiss MF, said, “In the medium term, we believe that there are two positives which give strong and convincing basis for an optimistic view. First, India Inc.’s balance sheet is in de-leveraged mode. It is operating at high capacity utilisation, which could lead to a capital expenditure cycle in 2024. The second positive is moderating inflation, which could improve consumers’ spending power over a period of time.”
Most analysts expect inflation and interest rates to begin to fall in 2024. It will put more money in the hands of consumers, and boost demand for goods and services in certain sectors. Retail inflation is expected to be 5.4% in 2023-24, but is expected to fall to 4% by the second quarter of 2024-25, according to the RBI’s projection. This will the RBI room to cut interest rates, which is good news for the markets.
“I think we are approaching the point where an interest rate cut is necessary to prevent an excessive real interest rate,” Jayanth Varma, an external member of the RBI’s Monetary Policy Committee (MPC), had told The Indian Express in an interview last week.
Markets and elections
The last five general elections indicate that markets approach elections with optimism. The Nifty rose an average 13% over the 6-month period leading up to these elections. This can be attributed to a pick-up in pre-election spending and populist measures, which are positives for consumption demand, Standard Chartered said.
Post-election performance data indicate that markets dislike surprise outcomes. The defeat of the NDA in 2004 triggered a sharp correction, and the markets cheered the clear verdicts of 2009 and 2014. The reaction to the 2019 outcome was, however, mixed.
This time, it appears so far that markets are pricing in the likelihood of continuity in the government, especially after the NDA’s strong performance in the recent state polls.
Retail push, FPI flows
The current rally is riding on a sustained push from retail investors, who have pumped in money into the stock market through mutual funds and direct investments. The number of demat accounts reached 10 crore in November 2023, and the MF industry’s net assets under management (AUM) rose to Rs 49,04,992.39 crore in that month, as against Rs 40,37,560.81 crore in the year-ago month.
Investment bank Goldman Sachs expects robust capital flows driven by robust equity portfolio flows as the Fed starts the easing cycle; robust debt inflows as India starts being included in the JPM GBIM global bond index beginning June 2024; and FDI inflows with India continuing to benefit from regional supply chain diversification.
Overall, Goldman Sachs has projected a balance of payments surplus of $39 bn in 2023 and $27 bn in 2024. These factors are expected to boost capital inflows into the stock market.
Some possible risks
Geopolitical events, especially the war in the Middle East and Ukraine, is a potential risk that can flare up. An escalation in the Middle East can impact the markets, leading to a spurt in crude prices, which will push up inflation. “The key risks for 2024 are global growth slowdown, escalated geopolitical tensions, if any, and any negative surprise from Covid erupting once again,” Pandey said.
2024 will be an unusually busy election year, with the US, India, Mexico, South Africa, Indonesia, and Bangladesh voting in national elections. In India, a surprise outcome could trigger market volatility in the near term.
Also, FPI investment is considered hot money that can exit faster than it enters, leading to a sell-off in the market.
Analysts expect domestic growth in the first half of 2024 to be boosted by an acceleration in consumption demand through election-related spending. Investment growth could pick-up in H2 2024 with an acceleration in private spending as the new government’s policy priorities become apparent. (Representative/PTI Photo) 
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