Around the time the nationwide lockdown was imposed in India in the last week of March 2020, the 30-share Bombay Stock Exchange Sensex had closed at about 26,000. Last week, the Sensex hit a high of 50,000 which is almost double the level it was 10 months ago.
No other stock index in the world has shown this kind of spectacular rise during this period though all have increased in their absolute levels. If we look at the increase in the stock prices of other major markets in the world, we can see that the Indian market has stood out in terms of the gains it has reaped.
Here is a look at the major global indices and their movement over the same period
The Nikkie index in Japan has moved up to 28,600 now from 18,000 in March 2020.
The HangSeng Index of Hong Kong has risen to about 29,500 in January 2021 from about 24,000 in March 2020.
The United Kingdom’s FTSE index has reached a level of 6,700 now from about 5,400 in March 2020.
The DAX index of the German market had risen to 13, 800 from 9,000 during the same period.
The Dow Jones Index of the United States is now at 31,000. It was around 22,000 in March, 2020.
While the increase in the levels of the stock market index is not indicative of economic fundamentals, this definitely offers pointers to a few positive developments as far as the outlook for our economy is concerned.
There are five main reasons for the rise in the stock market levels in all the major countries.
1. The easy liquidity policy followed by all central banks and the governments has resulted in money flowing into the stock markets all over the world. They have taken measures to ensure that money is available for pushing up economic growth.
2. Interest rates have been reduced by all the countries. In Europe and Japan, the effective interest rate is mostly negative now. People are thus being encouraged to spend rather than keep the money in the banks in deposits. In India too, interest rates have been reduced. Home loans are now available at below 7% per annum. These low interest rates have also pushed a part of the excess liquidity into the stock markets.
3. In India, the daily average excess liquidity with the banking system is estimated at about Rs 5.5 lakh crores during the recent period.
4. The world has quickly responded to the COVID by coming out with vaccines within a relatively short period of time. The vaccination drive which has started in all the developed countries has given rise to the hope that 2021-22 will be a year of economic growth.
5. The election and subsequent assumption of power by Joe Biden in the United States has renewed hope in the West that the United States will be more multi-lateral in its approach though the anti-China bias will remain.
But why is it that the Indian stock market has seen a boom of unprecedented proportions? What is so special about India that the Sensex should double within 10 months? Is this a good sign? Or should we be worried about an asset bubble? These are questions which are naturally raised by many people.
Answer to these questions is on the following lines:
The stock market is not the perfect barometer of the inherent strength of any economy. It follows patterns which are difficult to explain. But there are pointers/ indicators of what the market participants expect to happen in future. To that extent, we should watch stock market movements carefully so that market “expectations” are correctly read.
Investors in the West have developed an anti-China bias after the Chinese President Xi Jinping has made known his ambitions of asserting Chinese supremacy everywhere. The West is more weary of China than before. Not only is the Government of China looked upon with suspicion, even big Chinese corporates like Huawei and Xiaomi are seen as proxies for the Chinese Government.
In Asia, India is seen as a possible counterweight to China. India is a democracy and has now a strong Government at the Centre which enjoys a very comfortable political majority. This makes for India being seen as an attractive investment destination.
Political stability at the Centre and continuity of policies is seen as a major advantage by investors.
The Indian government’s announcement favouring Foreign Direct Investment in additional sectors including Defence has been a big positive as far as investor sentiment is concerned.
Though the first half of the current financial year has been a washout for India, corporate results of Indian companies, especially in the Information Technology sector like TCS, Infosys and Wipro in the third quarter give room for optimism for a turnaround or a V-shaped recovery for the Indian economy.
The Atma Nirbhar package of the Government has worked out well. Especially, rural India has seen robust economic activity. Almost all major consumer goods firms like Hindustan Unilever, ITC, Nestle and Britannia have reported high sales in the rural markets during the current financial year.The Union Government’s cash infusion into rural India has been a major boost for the Indian economy as a whole.
Agriculture growth in India has been rising quarter after quartet even during the time of Covid. This is a commendable achievement. It has helped increase income levels of rural households in all the States.
Having said this, it should also be borne in mind that the gyrations of the stock market should not be taken too seriously. Also, the Reserve Bank has been expressing repeated concern about asset prices being out of alignment with fundamentals of the economy — that is, many companies and the MSME sector are still struggling to come out of the effects of COVID-19. So we should not celebrate the stock market rally as some sort of final endorsement of a return to normalcy.
While we can be happy that the Sensex has hit 50,000 we should always remember that there are only about 2.25 crore people who actually invest in the stock market in a country of 130 crore people. They benefit directly. Corporates who raise money in the stock markets also gain in the process. But the boom is no proof of things being back to normal. Our optimism should be tempered with caution.
(The author is a top Indian bank executive who worked for four years in SBI, Singapore. Views are personal.)