Opinion Express View on Nifty crossing 20,000: Rise and pause

Notwithstanding daily fluctuations, the Indian stock markets have continued their spectacular run. On Monday, the Nifty index crossed the 20,000 mark. Since the beginning of this year, the index is up almost 10 per cent. This investor exuberance is not just limited to the larger companies. Both mid-and small cap indices have also witnessed a spectacular rally — since the beginning of this year, the BSE Mid Cap index is up 26 per cent, while the Small Cap index is up almost 27 per cent. The exuberance can also be seen across several sectoral indices — the Nifty PSU Bank index is up 8.95 per cent since the beginning of the year, IT is up 9.87 per cent, while Auto is up 26.86 per cent. Inflows into the markets remain healthy — equity mutual fund inflows surged in August, rising to Rs 20,246 crore up from Rs 7,62 crore in July. There has also been a steady increase in investments through the SIP (systematic investment plan) route, surpassing Rs 15,800 crore in August. Foreign portfolio investors have also been bullish this year, with net investments turning positive.

However, concerns over valuations are beginning to creep in. The BSE Sensex is now trading at a price to earnings ratio of 24.11. This is higher than its long-term average. The sharp rally in small and mid caps is also raising uncomfortable questions. As per a report from Kotak Institutional Equities, the primary driver of the surge is “irrational exuberance among investors”. The report goes on to say that there aren’t “many fundamental reasons for the meteoric rise in the stock prices of many mid-cap and small-cap stocks in the past few months”. If earnings don’t rise, there is some possibility of a correction. On Tuesday, BSE mid cap fell almost 3 per cent, while the small cap index fell 4 per cent, indicating some profit booking.

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According to the RBI’s analysis of 2,836 listed non-government non-financial companies, earnings (before interest, tax, depreciation and amortisation) rose by 9.7 per cent in the first quarter of the ongoing financial year, up from 4.8 per cent in the fourth quarter of the previous financial year. This was largely driven by lower raw material costs. However, the corporate sector’s revenue is coming under pressure. As per the central bank’s analysis, sales grew by just 2.1 per cent in the first quarter of 2023-24, down from 8 per cent in the fourth quarter of 2022-23. And as per its own projection, the economic momentum is going to slow down further — the central bank has projected economic growth to slow down to 6.5 per cent in the second quarter, and then to 6 per cent in the third quarter and 5.7 per cent in the fourth quarter. Expectations of the future trajectory of the Indian economy will have a bearing on investor sentiment.