Market buoyancy based on data, reflects reality

Sushma Ramachandran

Senior Financial Journalist

A FEW years ago, I heard a financial expert on a radio show being asked about the reasons for stock market fluctuations. The answer was: No one really knows why the markets go up or down. The expert was being candid. At times, the economic scenario may look bright, but markets will remain in a bearish mode, while in times of distress, there can be surprisingly bullish trends.

It is helpful to keep this in mind as one reflects on the soaring stock market indices of recent days. Last week’s business headlines were dominated by the fact that the Sensex crossed the 70,000 mark and the Nifty crossed the 21,000 mark. For the lay person, Sensex translates into the stock exchange-sensitive index of the Bombay Stock Exchange and the Nifty is the National Stock Exchange. The former comprises 30 representative companies of the BSE while the latter has 50 such companies. The skyrocketing rise in indices shows the higher valuations being placed on companies in the country’s two leading stock exchanges.

The immediate reason given for the cheer in markets has been the US Federal Reserve’s signal that there could be interest rate cuts in 2024. The surge here reflects similar trends in global markets last week following the Fed’s announcement. But the Indian bourses have been bullish for much longer in contrast to those in many other parts of the world. The driving factors include the improving economic data that has been released lately, including the higher-than-expected growth in the second quarter (July-September) of the current fiscal.

Yet, the economy was in the doldrums in 2020, when the markets moved in a contrary way. Initially, markets plummeted after the Covid-19 lockdown was imposed in March. This was followed by an unprecedented rally in the Sensex in October 2021. It coincided with the rise of a new breed of retail investors who were now interested in equities. Over this period, the number of demat accounts rose by as much as 35 lakh. Studies at the time showed that the bulk of the new retail investors was younger than the existing ones and relied for investment advice on online platforms. The fact that the market surged as a result of increasing fund flows meant the new entrants gained hefty returns over the next year.

In other words, amid extreme socio-economic distress, the markets were being driven upwards. It was in 2020-21 that the Indian economy contracted by 6.6 per cent and weaker sections of society, especially in rural areas, faced severe hardship. Such a glaring gap between economic reality and stock market highs during the pandemic indicates that bullish trends do not always move in tandem with the situation on the ground.

Keeping this element of caution in mind, one must welcome the recent rising graph in the Indian stock markets. Fortunately, the rally cannot be described as a state of irrational exuberance, the term coined by former US Federal Reserve chief Alan Greenspan to describe market optimism that is based more on psychological factors than fundamental valuations. Instead, the rise of the Sensex from 60,000 to 70,000 over a two-year period has accompanied the economic recovery which followed the growth contraction during the pandemic and the external headwinds subsequently posed by geopolitical tensions like the Ukraine conflict. Other markets have not dealt as well with these issues, so India has been relatively an outlier. The Eurozone, for instance, has remained depressed while Asian markets, including China’s Hang Seng Index, have shown a decline over the past year. Only the US and Japan, along with India, have continued to show buoyancy in their bourses.

The reasons for the upbeat mood in the Indian markets have been the consistent flow of positive news about the economy. This includes the unexpectedly higher growth of 7.6 per cent in the second quarter of 2023-24 following 7.8 per cent in the first quarter. In addition, revenue flows have continued to be buoyant, with the Goods and Services Tax inflows reaching record levels of Rs 1.7 lakh crore in October. Retail inflation also moderated to 5.5 per cent in November from the peak of 7.8 per cent in April last year. There are, undoubtedly, worrying elements in the overall scenario, including persistently high unemployment and the lagging revival of rural areas compared to the urban segment. But the broad thrust remains that the country continues to show the fastest growth among major economies in the world.

The advent of the domestic retail investor in large numbers during the pandemic has been one of the factors that has insulated the Indian markets from much of the volatility faced in other emerging economies. Thus, the reliance on foreign institutional investors to keep the market afloat has reduced considerably over the past two years. At a time when foreign institutional investors (FIIs) have been net sellers, domestic investors have taken their place and put their faith in India’s growth story, ensuring that the bull run continued despite spells of volatility.

The surge in the stock market must be viewed as a positive development for the overall industrial development of the country. Despite the need to be wary as bullish trends do not always present the full picture, the fact is that an evolving equity culture is an integral aspect of an expanding corporate sector. The new-age startups that have metamorphosed into unicorns and decacorns have received a boost from being listed on the stock exchanges. The good news is that the present buoyancy is not the result of a bubble or based on undue economic optimism. Instead, it is based on data showing the economy is poised to move on a higher growth path than expected earlier. To that extent, the markets are reflecting the reality rather than ephemeral trends. 

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