India has surprised everybody. No, this isn't a World Cup jibe. Our nation is on the verge of achieving macroeconomic stability as 2023 ends — despite potential rupee depreciation.
How it achieved this is fascinating. It begins with our crucial stock market indices (think NIFTY, SENSEX, etc.) that have performed consistently. Most are poised to yield over 10% returns in 2024-25, and pundits attribute this to robust domestic growth and a moderate inflationary environment. However, the cornerstone of India's economic upward trend lies in its real GDP.
By definition, GDP, or Gross Domestic Product, gives an overview of a country's monetary vigour. It adds up everything a country manufactures and the services it renders — to see how well its economy is doing.
India's GDP recorded a substantial Year-on-Year growth of 7.6% in the second quarter of fiscal year 2023, which is a definite positive sign. It surpassed the earlier projection of 6.5% by the Reserve Bank of India1. Does this mean we are ready to enter the big leagues within the South Asian market? Honestly, not yet. But we're getting there! Sectors including investments, budgetary spending, critical manufacturing, mining, and construction propel our GDP growth spurt. The chart below shows a positive correlation between Nifty and GDP since 2011.
As the fastest-growing major economy in the world, India is projected by S&P2 to sustain this growth trajectory with a GDP growth of 6.4% in 2024, further surging to 7% in 2026. Regardless of this “sunshine n’ rainbows” scenario, desi stock market investors are all still wary of the General Elections looming.
There's no point beating around the bush — the upcoming general elections scheduled for April/May 2024 will significantly affect the Indian stock market. Historical trends indicate that a stable government, fortified by clear mandates, instils confidence among investors, resulting in positive market reactions.
Conversely, a fragmented or uncertain election outcome may precipitate market turbulence. Morgan Stanley's recent report provides a few scary insights into potential market responses based on different electoral scenarios.4
It's not all gloom though. Reuters reported that India's retail inflation percentages are falling. Inflation — a period with a slow/steady rise in the prices of daily/must-have things — curtails everyone's purchasing power. Yet per the Consumer Price Index (CPI), retail inflation in the country has dropped to a four-month low of 4.87% in October 2023 from 5.02% in September 20233 .
This moderate inflation number surprises most of us, given how geopolitical strife in Europe and West Asia is causing havoc on the global market.
India's economy remains strong despite global challenges. There are a few reasons for this: domestic demand, infrastructure investment, and a resilient financial sector.
Nevertheless, fundamental risks persist — from elevated inflation to stringent monetary policies. Of course, the potential global economic deceleration could end in a US-based recession period (circa 2008).
Yet, there is more optimism for 2024, anticipating a resumption of the bull market rally for the S&P 500 — given the US Federal Reserve's pivot from interest rate hikes to rate cuts. While predicting market performances on a year-to-year basis remains a complex endeavour, the prevailing sentiment among analysts is generally positive for the outlook in 2024.
The compelling economic growth showcased by India, currently leading among significant economies, plays a pivotal role in driving domestic equities.
If credit availability improves, the upcoming year will favour domestic companies. Specifically, capex-driven companies are expected to show tremendous growth. Translation: Companies that use their funds to sharpen assets & expand operations may flourish.
Finance, automotive, consumer goods, and industrial sectors are poised to outperform. Investors who adopt a long-term perspective, concentrating on fundamentally solid stocks while remaining prudent about portfolio diversification — may manage to navigate potential market fluctuations.