The level of enthusiasm in the market can be gauged by the movements in the stock indices, and the rise witnessed of late has been phenomenal. In a way this reinforces the high level of optimism which is pervading the economy. Based on the reaction of market players this can be expected to persist in future too. But why has there been this sudden jump in the market?
The unexpected GDP growth
The leading factor has been the better than expected GDP growth numbers for the second quarter at 7.6%. The RBI has been indicating for quite some time that there would be a pleasant surprise for the economy in terms of this growth number. With this high number being driven by the manufacturing sector in particular, the mood has been boosted. In a way, it has been tautological because GDP is defined as value added which in turn is a sum of profits and salary bill. Hence high growth in GDP in manufacturing was due to high growth in profits which is already known and should have driven the market once the results were out. Clearly, the consolidated picture of GDP has been more potent than the micro numbers coming out in the months of October and November. The RBI’s forecast for growth this year has been upped by 50 bps to 7% which will be only marginally lower than the 7.2% witnessed in FY23.
Second, the results of the state elections can be considered to be a major booster for the market. The clear success of the NDA has rung the right note not because of the government at the centre making big gains, but being a reflection of what could happen in 2024 when the general elections are held. The final word on any successful policy framework is given by the electorate. The fact that three of the four major states have voted for the NDA is a vindication of the success of the ruling government and has been extrapolated to guide the results in the general elections too.
Corporate actions rely on certainty
This is significant because a lot of corporate actions are based on certainty in the policy environment. With this being a signal for continuity, the market has taken heart that private investment will continue unhindered and probably recommence in full swing even before the elections take place.
Third, there have been positive FPI flows into this segment which could be due to the other two factors. Also, the fact that the Fed will not be increasing the rates from hereon is a signal that funds flows to emerging economies would continue. This means that the pace of flow will increase and this is something that can continue through the end of the financial year. Also, it has been noticed that there is no longer a pattern of FPIs selling off in the last month of the year to book profits to pay their customers, which is encouraging.
A buoyant secondary market is evidently good for investors who are able to make money on their investments. But there are two other collateral benefits from a buoyant secondary market. The first is that there is a direct bearing on the IPO issuances as higher valuations are a precondition for companies to raise capital at this point in time. With stock prices high in the market there will be incentive for companies to fulfil their plans. This will be useful for the government in particular in case there are any disinvestment cases in the pipeline. As there is considerable slack on this front so far during the year, this buoyancy can provide an opportunity to the government to expedite the process. Hence the market will be looking out for such announcements for sure.
The mutual fund industry
The other benefit is for the mutual fund industry. It has been seen that over time, households are becoming savvier when it comes to dealing with their savings. There has been a tendency to move to avenues where returns are better. Mutual funds are preferred by those who would rather not have to analyse patterns of single stocks. With debt mutual funds already becoming less attractive due to the withdrawal of the capital gains tax benefit, one may expect more funds to move to the equity and hybrid schemes. This is good for the mutual funds industry though it would mean migration away from bank deposits on an incremental basis.
It may be recollected that in FY23 households moved their savings away from bank deposits to capital market instruments where the rewards were higher even though the risk involved was commensurate with the returns. The RBI did increase the repo rate last year and banks did see some migration back to deposits. But the deposit rates have almost peaked for most banks which are conscious of a possible turnaround in deposit rates. A result has been that they have increased interest rates on deposits with a shorter tenure of less than 2 years or slightly higher than one year. Under these conditions there can be a preference for the market as seen by a sharp increase in AUMs with mutual funds.
This could be a good omen
Stock markets across the world have behaved in a different manner compared with the growth tendencies witnessed in the developed countries. This can be because of the peaking of the interest rate cycle and a softer landing for these economies compared to what was prophesised earlier. The fallout will be more primary issuances that will translate to higher capital investment, something which has been lagging in the last few years. Therefore, this may be a good signal of the state of things to come. The RBI’s outlook in the policy announced yesterday points in the same direction.
The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal