A tenet of behavioural economics, a branch of the subject that has garnered attention over the past two decades, is the tendency of participants to rationalise events in hindsight. Recent fluctuations in global equity markets exemplify this.

While these markets saw a downturn in the recent months, the Indian market’s dip of less than 10 per cent does not qualify as a correction. According to market experts, a decline of more than 20 per cent is indicative of a bear market.

Despite surging bond yields, frequently cited as the culprit, this explanation seems too simplistic, especially given the long-standing trend of rising yields in anticipation of the U.S. Federal Reserve’s tightening steps. The Fed’s meeting on November 1 did not present a dovish stance, leaving room for potential rate hikes without hints of cuts. This raises the question: Why are Indian markets faltering?

Rupee overvalued

The Indian rupee is overvalued compared with its main export competitors like the Chinese Renminbi and Bangladeshi Taka. A country’s exports become more expensive to foreign trade partners, and its imports are dearer to domestic consumers when a currency is artificially propped up by the nation’s central bank.

This, coupled with the projected global market slowdown, has strained exports, as evidenced by prominent Indian IT- company performances. The RBI has taken steps like selling dollars to stabilise the rupee.

Post-Covid recovery

The recovery trajectory post-pandemic has been K-shaped. This suggests those in the upper brackets of wealth have tended to do quite well after the pandemic compared with low-income counterparts, who continue to stay laggards.

While luxury goods and gold retail thrived, entry-level car and two-wheeler sales lag pre-pandemic figures significantly. Data from Apple Inc. in India and luxury-car sales reaffirms this trend. Some proponents of the recovery stipulate India still stands to gain from such an economic trend. Unfortunately, apart from Jaguar Land Rover, Indian car manufacturers have been unable to tap this luxury boom.

Household savings, relative to GDP, are dwindling to unprecedented lows. Inconsistent monsoon seasons have led to increased food prices and dampened rural consumption. FMCG sales figures and subsequent corporate actions mirror this trend. The middle class faces financial strain, and looming job losses in India’s top IT firms compound the woes. Such challenges may further suppress consumption.

Conflict in West Asia

Tensions in West Asia have put the markets on edge.

Though petrol and diesel prices remain stable, auto- gas prices have surged. Industries like tyres, paints, and chemicals, which rely on crude oil, will likely face impact on sales and profit.

Rising inflation

Inflation is on an upward trajectory, particularly in food and services (comprising more than 70 per cent of the consumption basket). This trend may persist during the next six months. Diplomatic issues with Canada and Qatar complicate matters. Canada, a vital lentil provider for India, has seen reduced exports, and with Qatar being India’s primary gas supplier, an essential supply contract is up for renegotiation this year.

FII, FI investments

While FIIs divest, Indian retail investors, mutual funds and domestic institutional investors are purchasing. Retail investors and proactive mutual funds have borne the brunt of significant losses in the small and mid-cap sectors. Due to the reasons above, the upside potential for Indian equity seems limited, and there’s minimal hope for substantial FII investments in the foreseeable future. Market predictions suggest a continuation of the current trend, with potential further downturns if global conditions deteriorate.

The intricacies of global equity markets, especially in the Indian context, extend beyond headline-grabbing factors like surging bond yields. The nuanced challenges encompass currency-valuation discrepancies, post-pandemic recovery patterns, household savings dynamics, geopolitical strains, inflationary pressures and the contrasting behaviour of foreign and domestic investors. The confluence of these factors suggests cautious optimism for the India market, with an emphasis on vigilance and adaptability in the face of evolving global and local circumstances.

(Anand Srinivasan is a consultant. Sashwath Swaminathan is a research assistant at Aionion Investment Services)

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