Indian stock market rally – will it continue?

Nevertheless, India’s savings rate still remains strong. Traditionally a savings-oriented country, the economic slowdown brought down the saving rate (Gross Domestic Savings to GDP) to approximately 30%-31% as compared to the historical 33%-34%.

On the plus side, the decline is not steep. The proportion of household assets in shares/debentures remains volatile, but it has historically notched high flows during periods of market upswing.


Sustaining the macro indicators at reasonable levels, along with a revival in the corporate capex cycle and manufacturing following clarity on the political front and speedier policy making should help improve overall sentiment.

In terms of investment cycle, projects under implementation have seen a pickup recently despite new project activity remaining weak, as per CMIE. The recently set-up Cabinet Committee on Investments (CCI) has made some headway in moving stalled projects.

By January 2014, the CCI had cleared about 296 projects with estimated project cost of INR6tn, across power capacity, highways, rural roads, railway tracks, airports and ports. While the results on-ground may still take time to fructify, some turnaround in much-needed infrastructure revival can be expected.

There remain stiff challenges in public finances for the new government, whichever coalition it might be. If the new government cuts subsidies, it may impact inflation again.

Also, rollover of subsidies and welfare measures restrict its fiscal ability to spend on productive public expenditure which can create a chain-effect of job and income growth. In short, the fiscal conundrum can continue in the immediate upcoming years at least.

Speedier decision-making will depend on how soon the new government can finalize various policies and guidelines for its ministries/sectors. Manifestos of both the mainstream largest political parties for the 2014 elections talk about setting up policy framework etc to achieve growth in respective sectors.

However, execution can only follow planning, and the sooner the new government can go from planning mode to execution mode keeping all its coalition partners happy, the better it would be for India.

It is yet to be seen how the new government will fare in this. India’s projected GDP growth rate for FY2014-15 remains subdued.

A major positive is that the debt burden of the government is comparatively low, and India is not dependant on loans and advances from the IMF, World Bank or other multilateral organizations for ensuring its fiscal solvency.

In terms of the stock market, June 2014 onwards will be an interesting time depending on whether the retail investor segment picks up or not. While cash equities volumes have picked up in March and April months backed by FII inflows, it remains to be seen to what extent this run-up will continue following the elections outcome in the second half of May.

A lot will depend on how the vote numbers stack up, and this would have a major impact on investor sentiment and outlook. Revival of the retail investor segment (directly or indirectly through mutual funds) will hold key from June 2014 onwards, as some of the FIIs might be looking to sell and book profits on their positions. For this, revival of a strong retail and DII universe would be useful in terms of possible counterparties.

Cash equities volumes across India’s main equity exchanges seem to have bottomed out in the INR 130-140bn range on a daily basis since the last couple of years, and one might reasonably estimate that any incremental volumes from the retail side might only push up traded volumes.

Thus, the presence or absence of adequate counterparties might have a potential impact on market volumes and performance at that time, and it remains to be seen how the Indian markets will behave post June 2014 onwards.

The author works with a leading capital markets company in India. Views expressed are entirely personal and do not represent those of any entity.

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