New Delhi: reserve Bank of India (RBI) is helping to prop up the stock market with record-low interest rates and heavy injections of liquidity – even as inflation threatens to break out of its target range.
Investors are betting that the easy money won’t end anytime soon, with central bank governor Shaktikanta Das keeping a lid on discontent as the economy bounces back from its pandemic.
Foreign funds have infused $7.2 billion into the country’s equities this year and net inflows are expected to continue.
The market for initial public offerings (IPOs) is in turmoil, fueled by a frenzy of interest in startups, and India is poised to attract investors who are scared of China’s regulatory action.
Retail traders as well as domestic institutions are piling in, contributing a record $3 billion to equity funds last month.
While India has suffered a staggering loss from the coronavirus, lakhs of individual investors are rushing into stock trading with savings during the lockdown.
“The market is full of liquidity, which will absorb the downside, if any,” said Ashish Chaturmohta, research director, Sanctum Wealth Management Pvt Ltd in Mumbai.
“Sufficient money has been invested to support the economy and many sectors are witnessing continued growth with great future prospects.”
The benchmark S&P BSE Sensex has more than doubled from its Covid-induced nadir in March last year, accelerating gains this month as it continues to extend record highs.
The rally has made it the world’s best performer in the primary indices of countries with equity market capitalizations of at least $3 trillion in August.
Even as Asian stocks have seen a broad sell-off this week – the MSCI Asia Pacific index is down over 4% – with the Sensex down just 0.2% for the period.
inflation, virus
While an army of investors is betting on more gains for India, there is no shortage of risks either.
At the top of the list is inflation, which broke above the RBI’s 2%-6% target range in May and June before slipping below the top of the band in July.
Governor Das sees the recent spike as “transient”, but others disagree. Companies ranging from the Indian arm of Unilever plc to Tata Motors Ltd are struggling to absorb rising raw material costs and one of the RBI’s own rate setters said “reservations” about continuing the accommodative policy stance. “The voice has been raised.
The central bank is also alert to the dangers of a possible bubble in the market. The RBI, in its annual report earlier this year, warned that the injection of cash to support the economic recovery could lead to unexpected inflationary asset prices.
The Sensex is now trading at 22.5 times its 12-month estimated earnings, well above its five-year average of 18.8. In comparison, the MSCI Emerging Markets Index is trading at a multiple of 12.3.
Then the Federal Reserve is likely to tighten its monetary policy as soon as possible, triggering a rapid outflow of funds from emerging markets, including India.
And casting a shadow on everything is a virus.
After more than 430,000 deaths and 32 million infections, India’s vaccination rate is on the rise, allowing more economy to open up and shore up market sentiment.
But as the first country to be ravaged by the delta version of Covid-19, India has shown how quickly the outlook can change.
Investors are betting that the easy money won’t end anytime soon, with central bank governor Shaktikanta Das keeping a lid on discontent as the economy bounces back from its pandemic.
Foreign funds have infused $7.2 billion into the country’s equities this year and net inflows are expected to continue.
The market for initial public offerings (IPOs) is in turmoil, fueled by a frenzy of interest in startups, and India is poised to attract investors who are scared of China’s regulatory action.
Retail traders as well as domestic institutions are piling in, contributing a record $3 billion to equity funds last month.
While India has suffered a staggering loss from the coronavirus, lakhs of individual investors are rushing into stock trading with savings during the lockdown.
“The market is full of liquidity, which will absorb the downside, if any,” said Ashish Chaturmohta, research director, Sanctum Wealth Management Pvt Ltd in Mumbai.
“Sufficient money has been invested to support the economy and many sectors are witnessing continued growth with great future prospects.”
The benchmark S&P BSE Sensex has more than doubled from its Covid-induced nadir in March last year, accelerating gains this month as it continues to extend record highs.
The rally has made it the world’s best performer in the primary indices of countries with equity market capitalizations of at least $3 trillion in August.
Even as Asian stocks have seen a broad sell-off this week – the MSCI Asia Pacific index is down over 4% – with the Sensex down just 0.2% for the period.
inflation, virus
While an army of investors is betting on more gains for India, there is no shortage of risks either.
At the top of the list is inflation, which broke above the RBI’s 2%-6% target range in May and June before slipping below the top of the band in July.
Governor Das sees the recent spike as “transient”, but others disagree. Companies ranging from the Indian arm of Unilever plc to Tata Motors Ltd are struggling to absorb rising raw material costs and one of the RBI’s own rate setters said “reservations” about continuing the accommodative policy stance. “The voice has been raised.
The central bank is also alert to the dangers of a possible bubble in the market. The RBI, in its annual report earlier this year, warned that the injection of cash to support the economic recovery could lead to unexpected inflationary asset prices.
The Sensex is now trading at 22.5 times its 12-month estimated earnings, well above its five-year average of 18.8. In comparison, the MSCI Emerging Markets Index is trading at a multiple of 12.3.
Then the Federal Reserve is likely to tighten its monetary policy as soon as possible, triggering a rapid outflow of funds from emerging markets, including India.
And casting a shadow on everything is a virus.
After more than 430,000 deaths and 32 million infections, India’s vaccination rate is on the rise, allowing more economy to open up and shore up market sentiment.
But as the first country to be ravaged by the delta version of Covid-19, India has shown how quickly the outlook can change.
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