Will India’s surge run out of steam?

Indian stocks have been soaring in recent weeks. But investors may be getting ahead of themselves.

Indian stocks have been on a tear, rising by more than 15% since early September and hitting a new record this week. It's a marked contrast from this summer, when its currency and equities tanked.

One reason investors have returned is that the new central bank governor, Raghuram Rajan, has proved a safe pair of hands, attempting to squeeze out high inflation by raising interest rates twice.

The current-account deficit has fallen, thanks to higher import duties on gold, so India is now less dependent on foreign capital and its assets are thus less vulnerable to global sentiment.

Meanwhile, the lacklustre growth of the past few years appears to be bottoming out. In the third quarter, year-on-year GDP growth accelerated to 4.8% from the previous quarter's 4.4%.

And investors were cheered by the victory of the opposition, led by the pro-business Narendra Modi, in three state polls.

Yet the market surge seems unlikely to be sustained, says Capital Economics. For starters, growth may have ticked up, but there is a "bumpy recovery" ahead.

The improving global economy and recent slide in the rupee have boosted exports, but the key driver of growth is the domestic economy, and this still looks "shaky" due to the "poor investment environment", with pervasive red tape hampering a series of major projects.

As the government's efforts to rectify this have made little progress, it's no wonder investors are looking forward to the opposition taking over the national government in May. But it will still probably need support from "fickle, regional parties" to govern.

High inflation, moreover, continues to constrain household and corporate budgets. India's long-term prospects may be compelling, but for now, as Capital Economics concludes, markets are getting ahead of themselves.

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
How to invest in Africa as it takes its place in the post-pandemic sun
Emerging markets

How to invest in Africa as it takes its place in the post-pandemic sun

The African Continental Free Trade Agreement has come into force. Favourable demographics, improving governance and a growing technology sector also b…
14 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021