14 July 2021, 06:07 PM

India’s stock market boom – a reality check

India’s stock market boom – a reality check

 

 The Covid-19 pandemic has shattered economies and damaged wealth creation across the globe. The devastation was so brutal that practically no sector was spared, given the kind of dramatic reduction in consumer confidence and spending. India witnessed a 7.3% decline in gross domestic product in 2020-21. Millions lost jobs, unemployment rate sky-rocketed and thousands of small businesses were shut down across the country.

 

But while Covid-19 was ravaging the economy, the country’s stock markets went on to record new highs in regular intervals making financial professionals wonder as to the increasingly strange disconnect between economic wreckage and the record-breaking boom in bourses. While the combination of pandemic pain and financial-market euphoria is not unique to India, nowhere else has the contrast been so extreme.

 

The world’s worst coronavirus outbreak has battered India’s economy and its GDP was in the red after four decades. The events of 1979, until today, were the worst that the Indian economy saw since independence but even then, the GDP contraction was much lower at 5.2%. And yet investors continue to pour money in the bourses fuelling a 77% rally in benchmark S&P BSE Sensex and 53% rise in Nifty 50 Index over the past 15 months outpacing every other major equity benchmark index worldwide.

 

Stock market boom

 

At a time when economic activity in India has been derailed by the Covid-19 crisis, the country’s equity markets seem to be riding the second wave confidently. Both S&P BSE Sensex and NSE Nifty 50 — benchmark market indices — have been registering strong gains despite rising Covid deaths and declining economic activities.

 

The second wave of Covid-19 has made economists less optimistic about India’s growth prospects. Most of the rating agencies have trimmed their GDP growth forecasts for India for the financial year ending March 2022. These agencies had initially estimated double-digit growth for the Indian economy due to a low base and revival of business activities in the country after the first wave of Covid-19 in 2020.

 

For instance, Mumbai-based CRISIL, which had earlier pegged India’s economic growth for fiscal 2022 at 11%, has lowered its estimate to 8.2% in a worst-case scenario. Moody’s has revised the growth projection to 9.3% against 13.7% earlier. "The re-imposition of lockdown measures along with behavioural changes on fear of contagion will curb economic activity, but we do not expect the impact to be as severe as during the first wave,” the agency has said. S & P Global has downsized the growth forecast from 11% earlier to 9.8% now while Icra has revised it to 10% from 11% earlier.

 

The Reserve Bank of India, which had appeared optimistic during the early phase of the second Covid wave too has downsized its GDP growth projection for FY22 to 9.5% from 10.5% earlier. The latest World Bank report on global economic recovery post the Covid-19 pandemic published in early June has lowered India’s GDP growth forecast for the current fiscal from 10.1% earlier to 8.3% now.