Why in news?
The recent 10% dip in India's Nifty50 index, marking a "correction" phase, is attributed to foreign investors reallocating funds from Indian stocks to undervalued Chinese equities after China's government introduced two stimulus packages aimed at reviving its economy. The lower price-earnings ratios of Chinese stocks made them more appealing to global investors.
Additional pressures on Indian markets include global factors such as an anticipated protectionist stance in the U.S., concerns over high tariffs influencing Federal Reserve policies, and a possible interest rate hike by the Bank of Japan, which has led to an unwinding of yen carry-trades.
Against this backdrop, this article analyses the reasons behind the reaction shown by India’s indices.
What’s in today’s article?
- Market trajectory
- Reasons behind this behaviour
Market trajectory
- Recent performance of Indian Indices
- India's stock market has dropped by 10% over the past seven weeks, driven by both domestic and global pressures.
- Foreign investors have pulled out more than ₹1.40 lakh crore since October, dampening market sentiment despite sustained buying by domestic funds.
- Slipping corporate performance
- Adding to the strain, corporate performance is slipping, while high inflation threatens profits, curbs consumer spending, and delays interest rate cuts.
- Corporate performance has remained subdued, with India Inc’s profit growth for Q2 FY25 slipping to 4.1% compared to 37.8% a year earlier.
- While sales growth increased marginally, expense growth around 10% has compressed profits.
- Indian Markets in Correction Mode Amid Global Pressures and Domestic Weakness
- India's stock market has fallen by 10%, with the Sensex dropping 8,398 points from its peak on September 27, reflecting a mix of global and domestic factors.
- The Nifty Index has dropped in six of the past seven weeks due to pressures from persistent inflation, high interest rates, increased taxes on capital gains, and slowing private consumption, dampening investor sentiment.
- A stronger U.S. dollar and higher treasury yields have also weighed on emerging market equities.
- Further Correction Anticipated by Experts
- Market analysts predict potential additional corrections of 5-10%, given high Nifty 50 valuations, slower domestic consumption, and corporate earnings downgrades.
- Domestic Investors as a Market Support
- Despite the downturn, domestic funds and institutions have purchased over ₹1.30 lakh crore of stocks since October.
Reasons behind this behaviour
- China's Economic Stimulus Packages and FPI Impact on Indian Markets
- On September 24, the People's Bank of China introduced measures to stimulate the economy.
- On November 8, China launched a 10-trillion-yuan ($1.4 trillion) plan to address its growing debt and revive the domestic economy.
- This announcement triggered a significant sell-off of foreign portfolio investments (FPI) in Indian markets as investors reallocated funds to China.
- The sell-off was fueled by high Indian valuations, China’s recent stimulus, and comparatively cheaper Chinese stocks.
- Why are FPIs dumping stocks in countries such as India and lining up for China?
- China Signals Further Stimulus Amid Anticipated U.S. Trade Tensions
- China's Finance Minister announced on November 8 that additional stimulus measures are expected, with the government likely pacing its efforts ahead of President-elect Trump’s inauguration in January.
- Experts predict that China's fiscal stimulus could reach 2-3% of GDP annually in the coming years.
- Poor Earnings for India Inc. Amid High Valuations and Rising Costs
- India Inc.'s recent earnings season has disappointed investors, especially as FPIs assess high stock valuations alongside poor financial performance.
- A more than 10% rise in interest costs left net profit growth at just 4% y-o-y, indicating pressured profitability due to higher commodity prices, increased employee expenses, and muted revenue growth.
- Trump 2.0: Challenges for India's Growth Amid Global Uncertainty
- Trump’s second term could pose significant challenges for India’s economic stability, with trade wars, tariff hikes, supply-chain disruptions, and increased forex volatility.
- His proposed tax cuts, tariff increases, and stricter immigration policies may drive inflation in the U.S., complicating the Federal Reserve's rate-cut plans.
- This, in turn, could influence India’s monetary policy, with the RBI facing uncertainty before making significant policy decisions.
- Analysts believe a December rate cut is unlikely, and the 14-month-high retail inflation in October could push any such action further into next year.
