Investor optimism ebbs in Indian stockmarkets

“The bears are here for India’s stockmarkets,” says Megha Mandavia in The Wall Street Journal. “While a full-scale massacre isn’t necessarily imminent, investors should brace for a nasty mauling.”

India’s BSE Sensex index has been a top pandemic performer, gaining 77% over the past two years, despite a severe wave of Covid-19 in early 2021. Investors have been optimistic about the country – a thriving technology sector and major economic reforms are among the “novel confluence of forces standing to transform its economy over the next decade”, says The Economist. Yet the bullish mood may now be under threat for now. The Sensex has slid almost 8% so far this year.

The end of the party

The end of the party is partly due to the Reserve Bank of India (RBI). It recently raised rates for the first time in more than three years, by 0.4 percentage points to 4.4%, and is set to go much higher. Investment bank Goldman Sachs is forecasting a further 1.25 percentage point increase in rates this year.

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As in many countries, higher interest rates are being driven by soaring prices: domestic inflation hit a 17-month high of 6.95% this March, well above its target range of 2%-6%. However, the RBI has a distinctly tricky task ahead of it, says Mimansa Verma in Quartz India. Its challenges also include supporting the rupee, which faces multiple severe headwinds such as “soaring crude oil prices, the US Federal Reserve raising its interest rates, and an exodus of foreign money”. For example, the country imports 80% of its oil, so as oil prices soar, the current account deficit is set to increase. These factors help explain why the rupee has fallen against the US dollar, recording a new low of ₹77.73 a dollar this week.

Fleeing foreigners

These factors help to explain notably weaker demand for Indian stocks. “Foreign investors have been selling stocks in India since September, taking out nearly $24bn,” says Bloomberg. Now there are signs that domestic retail investors are starting to sell. High-flying tech stocks have been particularly hard-hit, with the sector falling by nearly 21% this year.

The performance of the country’s largest initial public offering (IPO) is another disappointing sign, says the Financial Times. This month, the government sold a 3.5% stake in state-run Life Insurance Corporation (LIC). While the IPO had been scaled back in size, it was still three times oversubscribed and priced at the top of its range. There were expectations that it would “yield windfalls for millions of investors”. Yet the shares fell 9% in their first day of trading this week. “The drop demonstrates that the country’s equity market is losing its appeal.”