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 century. This 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Bloomberg reports that since the end of September last year, foreign investors have withdrawn over $19 billion from the Indian stock market. This 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 alike. As 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 economy. Chetan 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 questions. A 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 investors. The MSCI India index saw its total market capitalization soar by nearly $2 trillion within just two years, reaching an all-time high last September. However, 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. As prices soar, consumers across metropolitan areas find their purchasing power severely diminished and are consequently more cautious about spending. Many discretionary purchases are often postponed or completely shelved, putting a significant strain on urban business activities and consumer markets. Furthermore, high inflation limits the central bank's capacity to lower interest rates, thwarting one of the most traditional tools for stimulating economic growth. An 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 losses. Should 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 drivers. Varun Laijawalla, a fund manager at Ninety One Ltd. in London, points out: "A crucial factor influencing the market is how the policy environment will evolve. If 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. Rita Tahilramani, a manager at abrdn Plc in Singapore, believes, "We welcome the recent pullback and view it as a buying opportunity, as we maintain a positive outlook on the long-term prospects." However, this optimistic perspective contrasts sharply with the prevailing market metrics, as many investors express concerns that despite recent declines, Indian stocks remain overvalued. According to Bloomberg data, the estimated future earnings yield for the Nifty 50 is at 19 times earnings, higher than most other major emerging market indices.
The challenges facing India are manifold, with domestic economic uncertainties compounded by international threats. The United States has signaled its intent to initiate tariffs against India, where a trade surplus approaching $35 billion exists. In response, India is deliberating on measures which include accepting 18,000 undocumented immigrants while also considering reductions in tariffs on American imports to placate the U.S.
The prospect for economic growth remains bleak, exacerbated by the negative feedback loop created by a faltering stock market. Analysts suggest that declining stock prices can compel companies to delay equity financing, leading to postponed investments that ultimately weigh down economic growth. In this precarious financial landscape, investor confidence is clearly waning. Ygal Sebban, the investment director at GAM UK Ltd., remarks: "We remain cautious on Indian equities."
This intricate web of economic indicators paints a complicated picture for India. With domestic demand faltering and external pressures mounting, the challenge for policymakers will be to instill confidence among investors while navigating a path toward sustainable growth. In a landscape riddled with uncertainties, the ability of India to rebound from this tumultuous phase remains to be seen.