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Journalism of Courage

Understanding the resilience of the Indian markets

Earlier this week, in a rare instance, a fall of nearly 4 per cent in the benchmark index in the United States had nil or negligible impact on Indian markets and investor sentiments. What is providing resilience to Indian markets?

Indian markets, after a nearly 2 per cent decline at opening, soon recovered — and closed with a marginal 0.35 per cent decline.

As the US inflation data for August came at an unexpected 8.3 per cent, the Dow Jones Industrial Average index fell sharply by 3.94 per cent on Tuesday, its worst fall since June 2020. Following this, Asian markets too came under pressure on Wednesday morning, and the Nikkei 225 in Japan fell 2.8 per cent. But Indian markets, after a nearly 2 per cent decline at opening, soon recovered — and closed with a marginal 0.35 per cent decline.

This was a rare instance when a fall of nearly 4 per cent in the benchmark index in the United States had nil or negligible impact on Indian markets and investor sentiments. Many in the investment industry see this as a reflection of India’s position in the world in current times when other major economies are faced with severe challenges.

What is providing resilience to the Indian markets?

First and foremost is the fact that the inflation in the US, which is keeping its market under check, is based on factors that do not impact the Indian economy and markets. While inflation in the US is led by wages, which leads to a higher service cost, that is not a factor in India. If inflation has led to rising interest rates and concerns over growth in the US, many believe that a decline in growth in the US, Europe, and China is in a way good for India — it would result in commodity prices falling. Also, crude oil prices that hurt the Indian economy and markets significantly (India imports around 85 per cent of its oil requirements) have, over the last couple of weeks, seen a softening; oil is currently trading at around $92 per barrel.

Secondly, foreign portfolio investors have returned to the Indian markets, and have invested a net of Rs 68,957 crore since the beginning of July. Many feel that this is likely to continue. FPIs were big sellers between October 2021 and June 2022, when they sold Indian equities net of over Rs 2.55 lakh crore over the nine-month period.

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The third factor that market participants point to, is the fact that at a time when the world is seeing turmoil and facing structural issues, India has emerged as the best place to invest both in terms of growth visibility and political stability. Many say that the numerous steps that have been taken on the policy front over the last few years — PLIs, incentives given to manufacturers, lower corporate tax, etc. — has provided structural tailwind to the economy and given confidence to both domestic and global investors.

How have Indian markets done vis-à-vis global peers?

As US and European markets suffered under growth concerns and inflation woes over the last 10 weeks, Indian markets rode on global liquidity flows and the resilience of domestic investors who held on to their investments and brought fresh investments. Since July 1, India’s benchmark index has been the best performer among key indices in the world.

The Sensex is up by 13 per cent from July 1; the only index that comes close is Bovespa of Brazil, which rose 12.2 per cent in this period. While Dow Jones has risen by only 1.2 per cent, the Shanghai Composite in China and Hang Seng in Hong Kong are down 5.9 per cent and 13.4 per cent respectively. In Europe, the Dax has risen by only 1.7 per cent in this period.


Net FPI inflows have been robust, even as inflation has stood above RBI’s target; RBI has raised repo rates by 140 basis points and GDP growth projections have been revised downward by various agencies.

Are there any concerns in this scenario?

If softening in commodity prices has comforted investors parking their funds in India for now, a rise in crude oil prices may pose a challenge for the Indian economy and markets. Also, Indian markets, because of the rally seen over the last three months, are trading at an expensive level, and that does pose a challenge with regard to the valuation aspect.


However, there is a sense in the market that while these concerns may remain for the near term, India is well positioned for strong growth over the next 5-10 years, and investors should not be too worried about near-term events and news flows. That is something that FPIs seem to be following, and domestic retail investors should, too.

“It is a liquidity 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, it is the place to be,” the CEO of a leading mutual fund said.

A top official with another mutual fund said that fund flows in Indian markets are now driven by faith that the Indian economy will double in the next 7-8 years. “Earlier, India was part of the global emerging market basket, but it has now transitioned to a single-country allocation. That is a big shift,” he said.

First published on: 16-09-2022 at 04:00 IST
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