The BSE Sensex ended Friday at 59,306.93 points, lower by 1.1%. It was the third consecutive decline, not something unusual. However, what’s drawn attention is that the declines have come on the heels of reports by global investment firms that are a tad pessimistic about returns from the Indian market in the near future. There are three macro factors influencing the trend. The world’s most influential central bank, US Federal Reserve, is tightening monetary policy. In India, RBI is headed in the same direction and higher energy prices will put upward pressure on India’s retail inflation.
These factors suggest that next year interest rates may harden, a development that negatively impacts equity valuation. Moreover, India’s equity market has witnessed an extraordinary 18 months, where the Sensex doubled. When returns are juxtaposed with macro changes in the offing, some foreign investors will reallocate their portfolios. In October, FIIs were net sellers, pulling out Rs 13,550 crore. The current calendar year has seen a net inflow of Rs 50,723 crore. To put it in perspective, November and December 2020, together recorded a net inflow of Rs 1.22 lakh crore.
Countering this trend, is the surge in domestic retail interest in equities as returns on fixed income instruments have been poor for two years. In the first four months of 2021-22, NSE said that there were 5 million new investor registrations. It will have a positive spin-off on the real economy. Over Rs 66,000 crore has been raised through IPOs in 2021 and given the issues lined up, this will be a record year. Equity funding provides firms with the leeway to raise more resources and it will have a positive impact on economic growth and job creation. In short, the equity boom rippled out into the wider economy. That can only be good news.
(Editorial in The Times of India, 30th October 2021)