The stock market indices- BSE Sensex and NSE Nifty- have been rising continuously since the beginning of 2017. Sensex and Nifty are supposed to be the indicators of the economic health of a country.
(Read: What is Sensex and how is it calculated?)
So the question is, why are the stock markets booming despite slowing GDP growth and sluggish corporate earnings?
- The most important factor is the rise in domestic investments. Indians are investing in the stock markets like never before. There has been a structural change in the way Indians keep their savings. The traditional investment avenues are not able to provide decent returns due to slump in the real-estate sector and the commodity market and low-interest rates on fixed deposits in the bank. So, India had to make a shift from physical assets to financial assets. (1) . In the first three months of 2017, domestic investors invested almost ₹16,000 crores in the equity market (2)
- There has been a rise in popularity of Systematic Investment Plans/ SIPS. Domestic retail investors who are not stock market savvy participate in SIPs. Under a SIP, an investor invests a fixed monthly amount into mutual funds every month. The mutual funds invest the amount in the equity market. According to an ICRA analysis, since the beginning of the current financial year (FY17-18), ₹23,750 crore has come through SIPs, up 44.4% year-on-year. Also, 8.55 lakh SIP accounts were added every month on an average (3)
- Foreign Institutional investors (FIIs) have also poured into the markets due to rise in global liquidity. They have invested $6.75 billion in equities in the first three months of 2017, up from inflows of just $3.19 billion and $3.18 billion in 2015 and 2016, respectively. (2)
The rally in stock markets can be due to expectations of better economic conditions in the future. The IMF and the World Bank have estimated growth to remain above 7% in 2018 due to structural reforms in the economy like GST and demonetisation.
Despite hiccups, India is still one of the fastest growing big economies in the world with strong macroeconomic fundamentals. But, for the stock market boom to be sustainable, corporate earnings will have to improve in the next 3-4 months.