Sushma Ramachandran

The news that Indian stock markets have soared to new heights affirms yet again that the economy is reviving after the setback faced due to the pandemic and geopolitical tensions in recent years. The rise in market valuations reflects the improved economic data on several fronts that indicates that the higher growth recorded last year is likely to be replicated in the current fiscal - 2023-24. It must be noted that share markets sometimes show irrational exuberance even though the fundamentals of the economy are not on track. But this is not the case right now as the data is increasingly showing the country is set to remain the fastest-growing major economy in the world for yet another year.

To recap, the Sensex crossed the milestone of 70,000 points on December 11, touching 70,058 points during the trading session and ending at 69,929 points. It reached the level of 60,000 points in September 2021 and has taken about two years to reach the 70,000 mark. The journey from 50000 to 60000 was quicker as it raced from January 2021 to September of the same year.

For the layperson, it must be explained that the Sensex is the term used for the stock exchange-sensitive index. It is the stock market index of the Bombay Stock Exchange and comprises 30 companies from different segments of the economy that are represented on the exchange. The valuation of these shares reflects the general trends in the stock markets.

With the Sensex having touched new heights, the contrast between India and most other major economies is looking stark. Markets in the eurozone have been underperforming last year while most emerging markets including China have also seen mainly bearish trends. The U.S. market, on the other hand, has shown robust expansion as has Japan. But these are outliers and India is part of this group.

This country’s market capitalisation has now also crossed that of Hong Kong and it has become the seventh-largest stock market in the world. According to data from the World Federation of Exchanges, the total market cap of the National Stock Exchange of India (NSE) reached 3.989 trillion dollars as of the end of November compared to 3.984 trillion dollars in the case of Hong Kong. The Nifty 50 index - the stock exchange index of the NSE - has risen by 16 percent this year compared to a 17 percent decline in the case of Hong Kong’s Hang Seng index.

The improved performance of India’s stock markets is a reflection of its gradual economic recovery. The latest data on the growth of gross domestic product (GDP) in the second quarter of the current fiscal (July to September 2023-24) shows that it has risen by 7.6 percent. This is far higher than anticipated by most analysts. Even the Reserve Bank of India had projected growth to moderate to 6.5 percent in the second quarter following the robust rise of 7.8 percent in the first quarter (April to June). Instead, it remained as high as 7.6 percent, compared to 6.1 percent in the same period last year.

The higher-than-anticipated growth in the second quarter has been fuelled largely by the manufacturing sector which shot up by 13.9 percent while the construction sector also rose by as much as 13.1 percent. Against this backdrop, the RBI has now revised its estimate for GDP growth in 2023-24 to 7 percent from the earlier projection of 6.5 percent.

Other positive data that reinforce the India growth story are the consistent upward trend in Goods and Services Tax (GST) collections. These surged to Rs. 1.67 lakh crore in November though this was slightly lower than the record of Rs. 1.72 lakh crore in October. Foreign exchange reserves have also reached a comfortable level of 604 billion dollars after a slight dip in the last four months.

On the inflation front, the central bank has managed to contain the situation successfully ever since it reached a peak of 7.79 percent in April last year. The interest rate hike cycle has been paused now for several meetings of the monetary policy committee though the bank is keeping a close watch on food inflation. The latest data for November shows a spike to 5.55 percent largely due to food products. But it remains within the RBI’s upper tolerance level of 6 percent hence there is no expectation of further rate hikes.

On the other hand, many other major economies in Europe and Asia have had to face the specter of rising inflation coupled with aggressive interest rate hikes by central banks. Bank failures in the U.S. extended to Europe while the conflicts in Ukraine and West Asia have also had wide-ranging ramifications.

Apart from the strong fundamentals of the economy, another element has pushed the bulls in Indian stock markets. And that is the faith of the domestic investor. Although foreign institutional investors (FIIs) have been pulling out of emerging markets, it has not had an adverse impact on this country. The reason is that domestic investors have bet heavily on the India growth story and have been investing heavily largely through the mutual fund route. There was a sharp rise in the quantum of retail investors in 2020 who were looking for alternative investment avenues during the lockdown. Equities became the asset of choice at the time and propelled markets upward even though the economy was in the doldrums. Domestic investors have since continued to be the mainstay of the Indian markets.

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The rise in stock market valuations, however, does not mean that all is well in the economy. Rural and semi-urban consumption is not rising as rapidly as in urban areas and the gap between the two needs to be bridged more quickly. Even so, there is no doubt that the economy is moving towards a high growth path and, this is surely a welcome development.