NEW DELHI: India’s equity market has seen a remarkable rally in the last 10 years as investors continue to show great confidence in Prime Minister Narendra Modi-led central government. Winning the last two General Elections with an absolute majority, the street believes there have been several positives for the market: stable policy, increased capital expenditure and robust inflow of funds.
On the back of this jubilant mood, two frontline indexes rallied and how. The BSE Sensex has roughly added 50,000 points in the last 10 years as it sprinted from 25,000 in May 2014 to 75,000 in April 2024 while the broader NSE Nifty50 has sprinted from 7,400 level to 22,500 level. The market capitalism of all BSE-listed firms also surged from R100 lakh crore to R400 lakh crore.
“Low-interest rates implemented by central banks in response to the 2008 financial crisis created an environment that encouraged borrowing and investment, fueling corporate activity and stock market valuations. Additionally, government stimulus packages enacted during economic downturns and periods of crisis, such as the COVID-19 pandemic, provided crucial liquidity injections that propped up markets and investor confidence,” said Sonam Srivastava, Founder and Fund Manager at Wright Research.
The first year of PM Modi i.e 2014 was a blockbuster one for the market as Sensex and Nifty advanced more than 30% each. However, in the years to come, the return stagnated and there were some years of good growth and some years of tepid or negative returns.
The markets took a big beating in CY 2015 when Nifty50 fell 4% and in 2016, the demonetisation year, the benchmarks gave a meagre return of 3%.
“Between 2015 and 2018, the markets experienced ups and downs. While there were periods of growth, factors like demonetisation in 2016 and the implementation challenges of GST caused temporary setbacks and volatility,” said Anirudh Garg, Partner and Fund Manager at Invasset. Garg added that the corporate tax cuts announced in September 2019 gave a significant boost to market sentiment.
The onset of the COVID-19 pandemic in early 2020 led to massive initial drops and in late March the markets crashed worldwide, reminiscent of the 2008 global financial crisis. This correction, however, was short-lived as liquidity infusion by central banks, a surge in retail investing, and optimism about vaccine rollouts started a bull run which is showing no signs of slowing down.
“The market has been supported by continued policy reforms, global liquidity, and strong earnings growth in specific sectors like IT and healthcare. Furthermore, the gradual normalisation of business activities post-pandemic lockdowns and the resilience of the Indian economy have contributed to the bullish sentiment,” said Garg. The strong trust shown by India Inc in PM Modi’s policy has been another characteristic of the market rally even as growth in corporate earnings faces difficulty in justifying current equity valuations.
“Corporate India’s bullish stance towards the Modi government can be attributed to several policy initiatives and reforms undertaken in his tenure. The government’s focus on infrastructure development, including investments in roads, railways, and digital connectivity, is perceived as positive for long-term economic growth and corporate profitability. Measures aimed at improving the ease of doing business by streamlining regulations and reducing bureaucratic hurdles are also welcomed by the corporate sector,” said Srivastava.
He adds that while corporate earnings have undeniably improved over the past decade, the current market valuations might not fully reflect underlying fundamentals. Some analysts argue that a potential correction could occur in the future if earnings growth fails to keep pace with market expectations or if risk factors resurface. Garg notes that substantial tax cuts in 2019, reducing corporate tax rates for existing companies to 22% and for new manufacturing entities to 15%, have buoyed earnings optimism. However, whether corporate earnings growth justifies the high stock market valuations observed over Modi’s tenure is more complex.
“While sectors like IT, pharmaceuticals, and consumer goods have shown strong earnings, contributing positively to stock valuations, other sectors have seen more variability. Moreover, factors such as global liquidity and low-interest rates have elevated price-to-earnings ratios, suggesting that high market valuations may not be fully justified by earnings growth alone but are also influenced by investor sentiment and future growth expectations,” said Garg.
