Over the past few weeks, the Indian stock markets have witnessed high volatility. The Nifty VIX, a fear gauge, has risen sharply since the end of April. On Tuesday, the VIX rose further, touching 24.2. Some have attributed the increase in volatility to the elections. Leaders of the ruling dispensation have sought to allay concerns. In a recent interview, Prime Minister Narendra Modi has said that the stock market will hit new highs on June 4. Prior to that, Finance Minister Nirmala Sitharaman and External Affairs Minister S Jaishankar had reportedly attempted to assure investors.
The rise in volatility comes in the midst of a rally which has also fuelled concerns over valuation. On Monday, during trading, the benchmark stock indices surged to record highs, with the Sensex touching 76,009, and the Nifty climbing to 23,110. The combined market capitalisation of all NSE listed companies had recently hit the $5 trillion mark. The country’s market cap to GDP ratio has also inched upwards. Retail investors have continued to exude optimism. The number of individuals investing both directly and indirectly, as seen in the number of new demat accounts and mutual fund folios, has continued to rise. The contribution through the systematic investment plan route is also growing. But, alongside, there are worries over stretched valuations, especially in the small and mid cap segment — some stocks are trading at a price to earnings ratio that is difficult to justify. There are also concerns over the heightened retail participation in the futures and options segment. And while domestic investors continue to be exuberant, foreign investors have been more circumspect. In March, just before voting for the national elections commenced, net investments by foreign portfolio investors stood at $4.24 billion. But, thereafter, the trend changed — in April, net investments by FPIs were -$1,036 billion, while in May (upto the 28th) they were -$2,667 billion.
In the near term there are several possible triggers for the markets. At the end of this week, the National Statistical Office will release the GDP data for the fourth quarter, which will provide a better understanding of the economy’s growth momentum. A few days after that, the results of the national elections will be declared, which will point to the policy tilt of the next government at the Centre. Later in that week, the RBI’s monetary policy committee will meet to decide on whether or not to maintain the status quo on interest rates, followed by the tabling of the Union budget in Parliament that will outline the next government’s policy agenda. Going ahead, these will determine the market’s trajectory.
