On Tuesday, the National Stock Exchange’s Nifty-50 share index crossed the 10,000-point benchmark for the first time in its two-decade history. The Bombay Stock Exchange’s Sensex also hit a record high of 32,374.30 in opening trade, continuing to breach its own records.
These buoyant figures come despite concerns over the mounting bad debt in banks, an investment slowdown and a rise in oil and commodity prices that could lead to trouble for an Indian economy that has slowed down post demonetisation.
Despite concerns that India’s economy is still on shaky grounds, the stock markets over the last few weeks have been reaching new highs almost daily. For instance, BSE Sensex hit a lifetime high of 32,224.14 on Monday morning in early trade, fuelled by heavy activity by both big and small investors. The Sensex is an index of 30 well established and financially strong companies that are listed on the BSE. The Sensex acts as a bellwether for activity on the stock markets across the country.
Nifty 50 covers a broader universe of the 50 largest companies listed on the NSE and provides a referential guide to investors on the way markets are performing. Nifty closed just short of the 10,000 mark on Monday.
This is in contrast to the state of the Indian economy. A report by the State Bank of India said that corporate lending by banks rose just 5.1% in the year, the lowest increase since 1951. Investments by private companies also hit a 25-year low in the last financial year as it rose only 5.8%, according to reports.
So, what is driving the stock market rally?
The surge in the stock markets is partly because of the performances of individual companies and partly because global investment is finally starting to turn to Indian stocks, according to market experts like Deven Choksey who owns KR Choksey Shares & Securities Pvt Ltd, a wealth management firm.
Choksey said a larger number of people and institutions are investing in Indian markets now, as compared to the last two-three years. This, he said, is the main reason for the continued stock market rallies, which also attract the interest of global investors.
“While a lot of money is flowing from large institutions or high net-worth individuals, retail investors [individual investors] are also participating more, especially after demonetisation, as it brought them closer to financial assets,” he said. In talking of bringing people closer to financial assets, Choksey is suggesting that in the aftermath of demonetisation, individuals have chose to put more money into financial instruments like mutual funds and fixed deposits, rather than keeping it in cash.
Data compiled by the Association of Mutual Funds in India reflects the growing interest of Indians in financial assets. The data shows that assets with mutual funds increased at an average of about Rs 33,500 crore each month after the demonetisation of high-value currency notes was implemented on November 9, as compared to earlier average increase of just Rs 7,000 crore a month.
Money flowing into mutual funds subsequently goes into large stocks, which carry more weight on the indices and drive up or bring down the benchmark indices. Reliance, Bharti Airtel, Axis Bank and Adani Ports have emerged as major gainers on the stock markets in the last week. This has driven up the indices higher, even though investors were not expecting companies to post huge gains in their results, said Anand James, Chief Market Strategist, Geojit Financial.
“There are some hiccups in corporate performance but largely, the environment has been supportive,” James said. “The inflation numbers were at record low. Monsoon is predicted to be normal so far and lately, there has been less volatility in the markets so we don’t expect them to correct (come down) anytime soon.”
James said that while the surge is largely because foreign investors are now putting more money in Indian markets than before, the good performance of the stock market was also a sign of faith in the economy after the Goods and Services Tax was rolled out. “There was uncertainty and there is still some in the markets but investors are hoping that this political will for reforms continues even after 2019,” James added.
However, Choksey said the impact of the GST on the economy and the pickup in the corporate sector needs to still be watched out for. “On the whole, things aren’t looking that bad,” he said.
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