India’s Stock Market is Largely Divorced from it’s Economy.

The coronavirus epidemic has forced the Indian economy into a slump. Repeated attempts to flatten the COVID-19 curve have pushed the country on the brink of an economic crisis. However, the stock market continues to outperform our expectations even as the economy flounders due to businesses shutting down their operations. India’s GDP has been coming down consistently, whereas the markets have recovered. This is even more surprising as there is an unprecedented rise in the unemployment rate of the country. So how can the market be inching higher even when the economy has gone into a nosedive?

Image Source: Trading Economics

Contrary to expectation, the indices rose simply on the backs of some 10 odd stocks including Reliance Industries Limited. This concentrated rally has made market players uncomfortable. Moreover, fund managers have shown more interest in putting their money in large and multi-cap funds while exiting from mid-cap and small-cap funds. Additionally, Petrol prices in India have continued to surge over the past two weeks, hitting lifetime highs, even though internationally crude prices have crashed and are not even trading at half of what they were.

Image Source: Trading Economics

The Indian government has declared a stimulus package to various sectors and industries to promote demand which was expected to energize the economy and led the much-desired lift. But in the true sense, the entire idea of stimulus package for small scale companies has failed terribly. Nothing of value has come from the government for sectors that are in tremendous pain and will take time to pick up – like travel/ tourism, entertainment, hospitality, handicraft, and retail.

Overall seeing that the ‘fundamental economy dots’ don’t connect to the stock market anymore busts the myth that the stock market index is a true barometer of the country’s economy. This also seems to be unique to the Indian Stock Market. So when you are investing, keep this point as a reference and work with a specialist financial advisor who can help you navigate such myriad turns of the stock market.

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