Indian stocks rise to record level - August update

An update on the reasons Indian stock markets are riding high (August 2021)

 Indian stocks rise to record level - August update

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• The story: Indian stocks rose again to new records during end-August, as investor optimism shot up due to US Federal Reserve chairman Jerome Powell’s comments that the withdrawal of stimulus would be gradual. That means huge liquidity will remain available for the markets. In parallel, the rupee strengthened to a recent high.
• The numbers: BSE’s benchmark Sensex rose to a record 56,889.76, while the National Stock Exchange’s Nifty index rose to 16,931.05, also an all-time high. The rupee climbed 0.6% to 73.27 a dollar.

1. What Powell said was that the Fed may start reducing its bond purchases (QE programme) this year but is in no hurry to raise interest rates and will be guided by data on Covid-19 risks. He did not give a specific timeline for scaling back stimulus.
2. His overall message was quite neutral. He discussed the five different aspects of monitoring inflation, including wages, long-term inflation expectations and global disinflationary forces, and the slant on most of them was fairly dovish.
3. Indian markets ignored concerns of rising Covid cases due to Powell’s dovish tone and expectations of strong corporate earnings.

• Local improvements: The improvement in key economic indicators, such as GST collection and auto sales, despite supply disruption, improvement in collections by microlenders and other high-frequency indicators like e-way bills, power consumption, import-export growth, indicate a sustainable rebound in earnings. This should help the market sustain the premium valuations.
• FPIs: Foreign investors bought $400 million in equities in August after selling $1.7 billion in July. Year to date, they bought $7.12 billion. In August, domestic institutional investors bought ₹7,572 crore, while they bought ₹24,708 crore in 2021. The tapering of bonds purchases may provide a modest headwind to equities and have a bigger impact on low-quality stocks.
• GDP growth data: Indian investors cautiously studies the gross domestic product data for the June quarter as it showed the impact of state-level lockdowns to stem the resurgence in covid infections. GDP expanded by 20.1% in the first quarter of fiscal 2022 from a year earlier, reflecting the low base of comparison when nationwide lockdowns were in place in 2020.
• Financial versus Real economy: In India, the financial economy has performed in a disconnected manner from the real economy. While mass poverty has made a comeback in India, reflected in the huge uptake of free foodgrains and the rapid depletion of MGNREGA budget 2021-22, the financial markets are least bothered. Their triggers are doing well, and that's all that counts.
• Triggers for stocks: Factors like corproate profitability, pro-business stance of government, Federal Reserves money-printing, low taxation rates, rising vaccination rates are keeping markets high, though joblessness too is at a record high in formal sector.
• EXAM QUESTIONS: (1) Explain what four factors act as triggers for Indian stock markets. (2) The financial asset owners have enriched substantially in recent years, as compared to those who slog in the real economy. Do you agree? Explain why. (3) Explain the general trajectory of economic growth in India, since 2016.
  

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Read more on - Polity | Economy | Schemes | S&T | Environment 

 

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