A debate has arisen over whether the US Federal Reserve must ease policy in support of growth. Indian equities were impacted, too, and global risk factors could play a role in the period ahead. What about domestic factors? Let’s analyse these.
Impending futures and options (F&O) curbs have not had much impact, so far, on the trend of indices. The adverse impact of India’s election result and budgetary provisions were also overcome quickly. First-quarter corporate results have not had any major positive surprise.
We think India’s macro stability and hopes of continued strong growth, aided by normal monsoon rains this year, may be key factors in the recent bullishness. Also, local investors, including those who came in after covid, have made good money, which may have drawn in more funds.
The equitization of savings has reduced market dependence on foreign inflows, and while this week’s shake-up had global origins, this has given Indian markets greater stability.
However, we cannot overlook the risk of another correction setting in over the next few months. Globally, the flow of money from quantitative easing by the world’s big four central banks since 2008-09, with similar infusions during covid, has resulted in asset inflation across all classes.
The big four’s balance sheets swelled from $4.4 trillion in September 2008 to $15.2 trillion in February 2020 and then to $26.4 trillion in February 2022, but their liquidity withdrawal is taking quite long, with the figure still at nearly $20 trillion in July 2024.
Expected rate cuts by the US Fed could further raise values, as equities typically rise in a falling interest-rate scenario (though past correlations don’t seem to be working nowadays). However, one should be cognizant of the ‘buy on expectations and sell on news’ theme that plays out in markets time and again.
The upside in the NSE Nifty seems limited from now on. We may be not very far from the top of the current move. However, after a period of correction or consolidation, we may aim for much higher targets, given the strength of Indian markets.
Our markets face potential risks on both the internal and external fronts. Internally, if monsoon rainfall is below expectations, then India’s much-awaited rural resurgence may have to wait longer.
In case India’s ruling coalition faces setbacks in state elections slated for October, there could be uncertainty over the Centre’s reform thrust, should the political climate get vitiated. Inflation (especially food) needs to come under control to allow for monetary policy easing that could boost the economy.
Externally, if the geopolitical situation worsens to India’s disadvantage (by way of slower exports, higher logistical costs, firmer crude prices and/or larger defence expenses), or if there is a meltdown in the small- and mid-cap space, it could slow down the momentum of Indian markets. Also, if the risk appetite of global investors shrinks, then we could see slower inflows and large outflows.
The next set of triggers for stock markets include the final outcome of the ongoing monsoon season (its spread and intensity), state election results, food inflation trends and the global interest-rate trajectory, apart from geopolitical developments.
Second-quarter corporate results, due in October and November, will show us how the pre-festive season has fared and whether a rural revival has happened.
Mid- and small-cap stocks have traditionally helped diversify investor portfolios and boost portfolio returns, which explains their sustained attraction. The proliferation of portfolio management services and alternate investment funds over the past few years has meant mid- and small-caps being chased by fund managers who must outperform benchmark indices.
This trend could prove counter-productive if economic growth falters or some unknown unknown hits markets. Till such time, investors basking in the glory of recent gains may grow even bolder, given how they are ready to pay high valuation premiums for such stocks.
Promoters of such companies have tasted blood with market capitalizations growing, and many have changed their attitude towards minority shareholders, which is a welcome development.
With cautionary statements and warnings issued by the Securities and Exchange Board of India (Sebi), we have seen a series of measures and proposals aimed at strengthening the derivatives regulatory framework for increased investor protection and market stability.
If Sebi’s proposals are implemented as proposed, they could hit trading volumes by high-frequency and retail traders (who tend to trade mostly in the last hour of contract-expiry days). This could have an impact on exchange volumes and their revenues, apart from raising impact/transaction costs.
While the risk of a shift in volumes to ‘dabba trading’ remains, we could also see investor interest move to index and stock futures—though, given the large margin requirements for futures, the number of participants may not rise meaningfully even as volumes do.
Also read: How F&O trading became India’s favourite game: Lessons from the Soviet Union
Indian market players are known to be adaptive. Even in a scenario of tighter rules, they may find a way out that again attracts the participation of retail traders, though not to the extent previously seen.