The Indian stock market, once a darling of global investors, is currently facing a protracted downturn, marking its longest streak of monthly declines since the dawn of the 21st centuryThis drop has sent ripples of concern through the financial community, highlighting vulnerabilities in what was previously heralded as one of the world's most promising economies.
Bloomberg reports that since the end of September last year, foreign investors have withdrawn over $19 billion from the Indian stock marketThis exodus has contributed to one of the worst monthly declines the country has seen since 2001, creating a sense of urgency among both policymakers and market analysts alikeAs India's economic growth is projected to hit a four-year low, and with the Indian rupee continuing its descent against the dollar, investors are watching closely for signs of recovery or further decline.
This unusual dual assault on the markets — both in terms of stock indices and currency depreciation — has not only dampened the optimism surrounding India's economic growth ambitions but has also sparked intense discussions about the overall health of the Indian economyChetan Seth, an Asia-Pacific equity strategist at Nomura Holdings, emphasizes the shift in investor sentiment: "The fervor around India is fading, and a growing number of investors are beginning to raise serious questionsA healthy debate about the Indian growth story is now essential."
In recent years, India's consumer and infrastructural boom had made it a hotspot for global equity investorsThe MSCI India index saw its total market capitalization soar by nearly $2 trillion within just two years, reaching an all-time high last SeptemberHowever, the cracks in this growth narrative are becoming increasingly apparent, raising flags about the sustainability of India's economic projections.
One of the driving forces behind this downturn is persistent high inflation, resembling an invisible hand that stifles urban consumption demand
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As prices soar, consumers across metropolitan areas find their purchasing power severely diminished and are consequently more cautious about spendingMany discretionary purchases are often postponed or completely shelved, putting a significant strain on urban business activities and consumer marketsFurthermore, high inflation limits the central bank's capacity to lower interest rates, thwarting one of the most traditional tools for stimulating economic growthAn array of cautious economists, after rigorous analysis and predictions, have warned that the downturn in the stock market could lead to a notable decrease in India's GDP growth, up to 50 basis points in the first quarter alone, pushing the economy to its weakest growth level in years.
Since peaking at unprecedented heights, India's NSE Nifty 50 index has fallen nearly 12% and is on track for its fourth consecutive month of lossesShould this trend continue, it would mark the longest monthly decline seen since 2001. Against the backdrop of this economic slowdown, Prime Minister Modi finds himself compelled to redirect his focus toward enhancing consumer spending, potentially obscuring the prospects for critical infrastructure projects that were once central to his economic agenda.
In this climate of uncertainty, policy directions have become key market driversVarun Laijawalla, a fund manager at Ninety One Ltd. in London, points out: "A crucial factor influencing the market is how the policy environment will evolveIf the upcoming budget strategically cuts back on capital expenditures, it could provoke a negative reaction." The uncertainty surrounding economic expectations just adds fuel to the fire of external risks that threaten to destabilize further trade relations, particularly amid looming tariffs from the United States.
While many domestic institutions and retail investors maintain a sense of optimism, with net purchases of $8 billion in Indian stocks this month alone—continuing a trend that belied a net inflow of over $70 billion through 2023—there is still a prevailing sentiment of caution among many investors
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