India’s stock market appears to have ignored concerns about political stability, as evidenced by the benchmark Nifty 50 index rising by over 1% in intraday trading on Thursday, June 6, following a rise of over 3% the previous day.
The Nifty 50 index fell nearly 6% on June 4 after the results of India’s Lok Sabha elections fell short of expectations. However, with widespread expectations that the BJP-led NDA will form the central government, markets are expecting policy continuity and some shifts on the policy front.
The medium to long term outlook for the market remains stable due to the country’s strong economic growth outlook, easing inflation and policy continuity.
“In the medium to long term, the structural story (earnings + capex + credit growth) remains intact and we believe India has entered a phase where earnings growth will outpace nominal GDP over the next few years. Hence, we maintain a constructive view on the long-term potential of the Indian market and maintain an overweight stance on financials, auto, real estate and select industrial and manufacturing companies,” said Rupen Rajguru, head of equity investment and strategy, Julius Baer India.
Here are five key factors that will support the Indian equity market in the medium to long term:
1. Strong growth prospects
India’s economic growth outlook remains bright for the current fiscal year and may continue to be so for the next few years. India’s gross domestic product (GDP) grew 8.2% in FY24, beating economists’ expectations, and is expected to grow at a 7% pace in FY25 despite global headwinds.
“The Indian economy is poised to achieve 7 per cent growth in FY25 with risks balanced, however geopolitical tensions and geo-economic decoupling pose risks to the country’s growth,” the finance ministry said in its latest monthly economic report.
Related article: India sees strong growth in FY25 amid global headwinds: Finance Ministry
In April, the International Monetary Fund (IMF) raised its forecast for India’s GDP growth rate for fiscal 2025 to 6.8% from the previous 6.5%.
Related article: IMF raises India’s FY25 GDP growth forecast to 6.8%
2. Reducing inflation
India’s Consumer Price Index (CPI)-based inflation, also known as retail inflation, eased to an 11-month low of 4.83% in April. While food price volatility remains a concern, core inflation has shown a sustained easing.
Brokerage firm Nirmal Bang expects India’s CPI inflation to remain relatively stable at 4.78% in May 2024, against 4.83% in April 2024. Core CPI is also expected to remain stable at 3.15% in May, against 3.23% in April.
Meanwhile, WPI inflation is likely to pick up to 2.05 per cent in May from 1.26 per cent in April due to a low baseline, higher food prices and price pressures in a basket of select commodities including metals.
Easing inflation has a positive impact on markets in several ways. It reduces input costs for businesses, making them more profitable. Additionally, it creates an opportunity for central banks to cut interest rates, making borrowing costs cheaper for businesses. Lower inflation also increases consumer disposable income, encouraging more spending and supporting overall economic growth.
3. Above-normal monsoon forecast
According to the India Meteorological Department, this year’s monsoon rains have been 106 percent of the long-term average, making it above normal. There is a 94 percent chance that monsoon rains will be above normal.
Related article: Monsoon rainfall predicted to be higher than normal in 2016: India Meteorological Department
India’s agriculture sector contributes significantly to the country’s GDP and is heavily dependent on monsoon rains. Also, higher than normal monsoon rains will ease inflation concerns. Sectors like FMCG and automobile are heavily affected by monsoon rains.
Also Read: Stock Market: Which Sectors Will Benefit From Monsoon 2024?
4. Interest rate cuts loom
Most experts expect the US Federal Reserve (Fed) to begin its rate cutting cycle in September this year, and the Reserve Bank of India (RBI) may also begin it in October.
YES Bank analysts expect the RBI to cut rates after the Fed’s rate-cutting cycle begins.
“With interest rate differentials between the two countries at historic lows, we believe the RBI is unlikely to get ahead of the Fed in this rate cutting cycle,” YES Bank said.
Read more: RBI MPC meeting underway: Central bank likely to keep repo rate unchanged; 4 key reasons
Experts believe that the start of a rate-cutting cycle could trigger a new rally in the stock market.
5. Increasing power of domestic investors
Strong inflows of domestic investors are a big positive for the Indian equity market as they reduce the risk of a market crash due to a large outflow of foreign capital.
Also read: Explained: Why Indian markets are hitting record highs in May despite FPI outflows?
The number of registered investors on the BSE stood at around 175.3 million, up 32 percent from last year.Even as foreign investors sold Indian stocks in April and May due to premium valuations and concerns over uncertainty surrounding India’s Lok Sabha elections, domestic investors continued buying, providing strong support to the market.
While the Nifty 50 has risen around 4% so far this year, FPIs have been selling Indian stocks. ₹26,583 crore so far this year, according to NSDL data.
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