What’s Next for the Indian Economy?

The Indian stock market has recently witnessed significant corrections, with the Nifty 50 index dropping below its 200-day moving average (200 DMA) for the first time since April 2023. This technical breach, often viewed as a bearish signal, has raised concerns among investors. However, a deeper dive into the data reveals that while corrections are unsettling, they are not uncommon and often set the stage for potential recovery.

Market Correction: Recent Trends

The Nifty 50’s Price-to-Earnings (P/E) ratio has decreased from over 24 to around 21.7, reflecting adjustments in valuations amid widespread earnings misses across sectors. Similarly, the CAPE (Cyclically Adjusted Price-to-Earnings) ratio, which provides a longer-term perspective by adjusting for economic cycles, has also dropped to levels reminiscent of the 2008 financial crisis. This trend suggests that Indian equities have become more reasonably priced, offering potential opportunities for long-term investors.

Historical data indicates that when the Nifty has crossed below its 200 DMA, the index has rebounded positively 60% of the time over a one-month period, with this percentage increasing to 70% over a year. On average, returns over a 12-month period following such corrections have been 19.4%, underscoring the resilience of the market.

Current Economic Indicators

While the markets reflect investor sentiment, the real economy paints a more nuanced picture. Key economic indicators present a mix of encouraging signs and underlying challenges:

Positive Signals:

1. PMI Growth: The Purchasing Managers’ Index (PMI) indicates robust growth in manufacturing, driven by strong domestic and international orders. Employment has also improved, reducing backlogs for the first time in over a year.
2. GST and E-Way Bill Collections: GST collections reached ₹1.87 lakh crore in October 2024, a 9% increase year-on-year. Similarly, e-way bill collections, an indicator of trade and transportation activity, grew by nearly 19%. These figures reflect sustained consumer spending and active trade despite inflationary pressures.
3. Rural Recovery: A decline in demand for the MGNREGA program suggests better job availability in rural areas, supported by a favorable monsoon season.

Challenges:

1. Inflation: Input and output costs continue to rise due to persistent inflation in materials, labor, and transportation, putting pressure on profit margins.
2. Softening Industrial Activity: Major ports reported a 3.4% decline in cargo volumes, and railway freight growth has stagnated. These trends indicate potential weakening in industrial demand.
3. Rural Wage Stagnation: While rural employment has improved, high inflation in essentials like food and fuel erodes the purchasing power of workers, limiting the benefits of higher income.

Outlook for the Indian Economy

The Indian economy stands at a crossroads, exhibiting resilience in some areas while grappling with structural challenges in others. Here’s a closer look at the road ahead:

Short-Term Outlook:

1. Consumer Spending: Strong festive season spending and steady GST collections suggest that consumer confidence remains intact. However, rising inflation could dampen this optimism if left unchecked.
2. Monetary Policy: With inflation at a 14-month high, the Reserve Bank of India (RBI) is unlikely to cut interest rates soon. This cautious stance may help anchor inflation expectations but could slow economic momentum.

Medium to Long-Term Outlook:

1. Industrial Recovery: While industrial activity has softened, infrastructure investments and policy support could drive recovery in the coming quarters. The government’s push for manufacturing and exports will play a pivotal role here.
2. Global Headwinds: External factors, such as geopolitical tensions and global economic uncertainty, could influence trade and investment flows into India.
3. Structural Reforms: Continued focus on structural reforms, particularly in labor markets and rural development, will be crucial for sustaining economic growth and addressing wage stagnation.

Market Implications:

Investors should brace for short-term volatility but remain optimistic about long-term prospects. Historical trends suggest that Indian markets have strong recovery potential after corrections, making this an opportune time for disciplined, long-term investment strategies. Diversification across asset classes and a focus on quality stocks with robust fundamentals could mitigate risks.

Conclusion

The correction in Indian markets reflects a natural recalibration of valuations amidst evolving economic conditions. While challenges like inflation and industrial slowdown pose concerns, robust consumer activity and resilient macroeconomic indicators highlight India’s growth potential. For investors and policymakers alike, the key lies in navigating this mixed economic landscape with a balanced approach, leveraging opportunities while addressing underlying vulnerabilities. As history shows, patience and strategic planning often yield significant rewards in the dynamic world of investing.

Market this week

Source: BSE and NSE

• Indian benchmarks rebounded strongly in the week ending November 22, snapping a two-week losing streak with nearly a 2% gain.
• Markets shrugged off concerns over Gautam Adani’s bribery case, fresh geopolitical tensions, and persistent FII selling.
• On the sectoral front: The BSE Realty index surged over 6%, BSE Auto, Metal, and Capital Goods indices each gained 2%. The BSE Oil & Gas index declined by nearly 2%.
• Foreign Institutional Investors (FIIs) continued their selling spree, offloading equities worth ₹11,414.18 crore during the week.
• Domestic Institutional Investors (DIIs) supported the market, buying equities worth ₹11,036.76 crore.
• In November so far, FIIs have sold equities worth ₹40,947.35 crore, while DIIs have purchased equities worth ₹37,559.08 crore.

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

Reliance Industries: International brokerages Morgan Stanley and JPMorgan reiterated their bullish stance on Reliance Industries with ‘overweight’ ratings. JPMorgan highlighted the reversal of weak refining margins, a key factor in the company’s recent underperformance, alongside muted retail sales growth. Morgan Stanley echoed this sentiment, noting a recovery in margins after two challenging quarters. Globally, the anticipated shutdown of 600,000 barrels per day of refining capacity by 2025 could further boost Reliance’s free cash flow amid tightening supply.

Raymond: Shares of Raymond surged over 7% to ₹1,535 on November 22, after receiving a ‘no objection’ letter from BSE and NSE for the demerger and listing of its realty arm, Raymond Realty. This achievement follows the earlier demerger of its lifestyle business, marking significant restructuring efforts within the group to enhance focus and unlock shareholder value.

State Bank of India (SBI): SBI gained over 2% to close at ₹799 on November 22, rebounding after a two-day losing streak. Jefferies reaffirmed its “buy” rating on the stock with a target price of ₹1,030, implying a 29% upside. The brokerage identified SBI as its top sector pick, citing potential improvement in the loan-to-deposit ratio as deposit growth accelerates. SBI’s management remains optimistic, projecting 14–16% credit growth and 10–11% deposit growth in the near term.