Over the past three months, Indian markets have traded cautiously with the Nifty50 index confined to a narrow 1,000-point range between 21,800 and 22,800. However, this week saw a break from this trend and the market comfortably surpassed this range, closing at a fresh high of 22,952 after crossing 23,000 intraday. In the short term, the market direction will depend on the final outcome, especially given that market sentiment indicates growing expectations of a big win for the incumbent government.
This week’s breakout was triggered by the market approaching the D-day, with only a week left for the announcement of the national election results. Volatility ahead of the election results was the main reason for the market consolidation, driven by selling by FIIs. Foreign investors decided to invest in other emerging countries at a time when the country will be busy voting, from March 20, the notification date for phase 1, to June 4, the final election result, for a total of two and a half months. India’s economic engine has slowed down in terms of new measures, policies and spending. With MSCI-INDIA’s premium over MSCI-EM at a high 80%, it makes sense for FIIs to shift their focus to other emerging countries. At the same time, the improvement in the Chinese market due to green shots by the government is providing new measures to stimulate growth and resolve real estate issues. FIIs have been net sellers in India for the past two months.
Another factor supporting the market surge is the early arrival of the southwest monsoon observed along the south coast this week. The monsoon arrived around two weeks earlier than usual due to a cyclonic storm in the central-eastern Bay of Bengal, bringing with it a low pressure system. This has provided relief to struggling sectors such as FMCG and consumer goods, which are heavily dependent on rural demand and input costs. The adverse impact of extreme heat in FY24 has impacted the performance of agriculture and rural demand related industries. The weak outlook forecast is sure to be revised again for FY25 as the La Nina phenomenon will have a strong impact on agriculture, boosting food grain yields and the rural economy.
Thirdly, several sectors such as metals, power, capital goods, real estate, automobiles and public sector companies supported the market, leading to new highs. Metals were driven by green shoots in China and rising demand for copper in renewable energy, where supply is shrinking due to sanctions on Russia, the main producer. Metal stocks have risen 30% in the past two months. Infrastructure, capital goods and automobiles have been the best performers, driven by rising domestic demand from government spending and manufacturing.
With a strong focus on India’s GDP growth, Indian manufacturing companies have outperformed the overall market by 4x in the past two months. GDP growth is projected to reach 7.8% by the end of FY24, which compares with an average forecast of 6.5% in January 2023. GDP growth is projected to be 6-7% for FY25-FY30, but could well be revised upwards given the trend towards further strengthening manufacturing policy measures.
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