- People keeping watch over the market dynamics would have noticed a welcome trend over the last few weeks as the Indian Sensex surges ahead on the back of positive domestic investors’ moves. This comes despite several challenges. The entire global community is yet to recover from the pandemic-induced economic devastations would be an understatement. Adding to the worries is the ongoing Russia-Ukraine conflict which shows no signs of closure despite monumental efforts from global entities. The global supply chain disruptions have only exacerbated the overall gloomy situation leading to inflationary tendencies. The price rise in essential commodities is singeing the global community making life extremely challenging to lead.
PC: AMAN KUMAR
- The governments are making efforts to address the matter pragmatically. However, in a welcome development, the Indian market showing signs of robustness should warm the cockles of all concerned. Sensex closing at 62,681.84 points on 29th November is a record high. Indian equities are an outlier, unaffected by the flow of negative global economic and geopolitical news. Of course, there are proximate reasons such as a cooling of prices of key commodities like oil since the crude prices too have come down from a high of $111 per barrel to $81 per barrel. That’s bound to have influenced the current surge in equity indices. But of greater importance is a sticky trend suggesting not just equities, but the larger financial system showing signs of change.
- Indeed, for long, foreign portfolio investors (FPIs) have had an outsized influence on equity indices here. Hence every global shock has had a big impact on both India’s foreign exchange and equity markets. This is weakening. Consider the aggregate FPI investment pattern since April 2021. Over the last 20 months, almost $22 billion of FPI investment has flown out of equities. Over the same period, the BSE Sensex has risen 25%. This is perhaps the most important change as domestic inflows into equities have more than offset FPIs. Households, the main source of savings in India, have driven this change. RBI’s data shows that in the 3 years preceding 2020-21, household net financial savings as a percentage of gross national disposal income was between 7.5% and 7.9%.
- In the pandemic year, this surged to 11.5%. This may not fully account for the trend in equities. Other areas where household saving flow such as life insurance funds and even EPFO have also undergone a significant tilt in favour of equities. Mind you, India’s bank-dominated financial market is in the midst of a transformation. RBI estimates that bank credit accounts for nearly half of the total flow of resources to the commercial sector. Of the remaining flow of resources, as the share of equity grows it simultaneously enhances the availability of riskier forms of investment into the commercial sector. It comes just as automation disrupts traditional economic structures. India’s entrepreneurs should be delighted. Some cheerful news for sure.