Has the Indian market decoupled from top global markets? Here's what is working in its favour

'Decoupling' as as theme is being talked about a lot in the Indian stock market investor community nowadays as Sensex and Nifty continue to defy global cues and rise higher and higher even as macro-economic indicators continue to push major nations towards economic hardships and stock market dips. 

Decoupling, in this context, simply means that the Indian economy is resilient on its own and isn't dependent anymore on global factors and hence isn't affected by issues like Russia-Ukraine War, inflation, falling growth, etc. 

However, is there any merit in this theory? 

After all, inflation in India has been way above Reserve Bank of India's 'comfort-zone' and growth has been sputtering. 

Nonetheless, domestic equity benchmark Nifty50 outperformed most of its major global peers in August thanks to an improving macroeconomic outlook, sustained buying by foreign portfolio investors (FPIs) and easing commodity prices.

As analysts highlight, high-frequency indicators, such as power demand, PMI prints and auto sales numbers have shown signs of improvement while retail inflation is also expected to ease in the current and coming months. With the festive season ahead, the demand scenario also looks bright.

A report by Bank of Baroda (BoB) highlighted that the Indian benchmark Nifty and UK index FTSE have vastly outperformed between January-August 2022.

While the Indian benchmark (Nifty) rose 2.3% and FTSE advanced 2.8% in January-August, US indices S&P500 and Dow Jones lost 10.7% and 7%, respectively. Among Asian peers, Hong Kong's Hang Seng shed 15% whereas Japan's Nikkei declined half a percent, the BoB report said.

What is working in India's favour?

There is a strong belief among economists and analysts that the Indian economy is on solid footing and is unlikely to face a recession in the short to medium term, unlike the US and the UK, which underpin market sentiment.

FPIs have been buying even as rates are rising and dollar and US treasury yields are getting stronger.

India is now the world’s sixth largest economy ahead of the UK and as per a report by the State Bank of India (SBI), the country will outstrip two other major economies by the end of this decade. The report says that India would surpass Germany in 2027 and most likely Japan by 2029 at the current rate of growth and become the world's third-largest economy.

"The share of India’s GDP is now at 3.5%, as against 2.6% in 2014 and is likely to cross 4% in 2027, the current share of Germany in global GDP. The path taken by India since 2014 reveals India is likely to get the tag of the third largest economy in 2029," SBI said.

While the reforms initiated by the government are a major factor which has contributed to the economy, a slowdown in China is also favouring India.

"In coming days, India is likely to be the beneficiary as China slows down in terms of new investment intentions. At the beginning of the 21st century, China embarked on an accelerated growth path occupying the second largest economy tag. We believe, with the right policy perspective and realignment in global geopolitics our current estimates might even undergo an upward revision," SBI said.

While the world economy is under stress, investors are looking at India with optimism.

Economic activity in the Eurozone contracted further in August, with the S&P Global eurozone purchase managers composite index falling to an 18-month low to 49.2 from 49.9 in July.

A gauge of India’s services sector recovered from a four-month low, led by job creation and new businesses. The India Services Business Activity Index, compiled by IHS Markit, stood at 57.2 in August compared with 55.5 in July.

But there are concerns too

But the road ahead is not free from obstacles. India remains a long-term story but in the short and medium term, the market is likely to remain on a volatile pitch, reacting to FPIs flow, rate hikes in the US and geopolitical issues.

The economy, too, has some fault lines. Despite the cooling off in commodity prices, the trade deficit remains elevated and this trend may continue.

During August, India’s trade deficit widened to $28.68 billion as imports climbed sharply by 37% to $61.68 billion while exports declined marginally to $33 billion.

This is further expected to weigh on the rupee's health, which has already depreciated 7% against the US dollar through this calendar year. Also, it has increased the risk of India's current account deficit (CAD) staying elevated.

"After topping in July, amid the peaking of most of the global commodity complex, the trade deficit remains considerably above US$25 billion. This increases the risk of India's current account deficit staying elevated, despite the recent commodity price correction," said Madhavi Arora, Lead Economist of Emkay Global Financial Services.

Arora sees the scope for the trade deficit to remain over US$20-25 billion for an extended period, as energy prices (led by oil and coal) remain elevated.

"Our FY23 CAD forecast stands at $118 billion (3.4% of GDP against 3.2% earlier). CAD funding pain is likely to linger, as global portfolios continue to reassess positions amid financial tightening & recession fears, thus demanding higher emerging market (EM) risk premia," said Arora.

What should you do?

Analysts advise investors with short-term horizons can book some profit on rise but investors with a long-term view should remain invested.

"An investor who is at the end of the investment horizon (less than one year) may look to sell. However, an investor who has an investment horizon of more than two years may continue to hold onto equities and invest systematically," said Jitendra Arora - Senior EVP and Fund Manager – Equity, ICICI Prudential Life Insurance Company Limited.

India's economy has some challenges but still it is expected to grow at healthy rates. A healthy economy will ensure a healthy return from the equity market. Domestic-centric themes could be best bets at this juncture.

"We are convinced about the medium to long-term prospects of the Indian markets and believe that Indian equities are likely to deliver double-digit growth over the next decade, remaining a good investment avenue for a long-term investor," said Arora of ICICI Pru.

Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.