Looking at the economical activity and fundamentals, you might wonder why is the Indian Stock Market Index rising?
Before I answer this question, it is always interesting to have a relook at the past year’s market performance as it gives us a good perspective that solidifies our understanding of the market.
The year 2020 was indeed an abnormally exceptional year due to the crest and trough we have seen in the past 12 months.
While this year has seen NIFTY making the lows (<8000) in March and then making a high of 14000 on the last days of the year.
Here is the annual chart of NIFTY for CY 2020.
Now let us look at our GDP growth rate chart and it is not at all surprising due to the pandemic
We have been told many times that India’s rising GDP is the main driver of Sensex growth.
However, this wisdom looks quite misplaced and doesn’t exactly solve/explain the puzzle – why is the Indian stock market index rising in spite of India being in a technical Recession (with 2 consecutive de-growth).
On the face, it looks puzzling and confounding to most of us.
But we think that this stock market growth is not a bit of sheer luck but primarily driven by two factors.
Factors Giving a Rise to Indian Stock Market Index
Let us start with the most important driver of this wealth creation journey for Indian investors.
Indian bourses have 3 main participants driving the prices of the stocks:
Let us analyze the FIIs & DIIs flow during the year:
So during the year, FIIs have been buying mostly and DII were selling. So, the net cash monthly inflow to market looks like this:
November was the month when FII withdrew from most of the emerging markets including South East Asia and invested heavily more than Rs 60,000 cr in Indian stocks.
So What Drove FIIs to India?
Traditionally, FIIs look to the following factors in any economy before they buy heavily there:
India ticks on all 3 spots hence have received huge inflows from FIIs. The next question that comes to mind is:
Where FII Money is Coming From?
The Quick answer is the chart depicting the balance sheet of the US Federal Reserve:
What this chart means is: In 2020 alone, the US Fed had printed ~4 trillion US dollars which is a bigger amount than India’s GDP in USD dollars. This huge capital injection has led to an abundance of liquidity in the hands of US-based FIIs.
Also, the role of MSCI cannot be undermined.
In the Emerging Market Index of the previous year, respective weightage to emerging markets looked like this:
However, during November, the MSCI Index changed the composition of India’s weight from 8.1 % to 8.8% (a 10% rise). What this meant to India was Rs 14,000 cr of liquidity. Wonderful!!
Now let us explore the second Reason behind the rise in the Indian stock market index and surrounding euphoria.
As per November 2020, RBI Consumer Confidence Indices have been shown below:
Households remain optimistic about the one year ahead situation, with the future expectations index (FEI) remaining in growth terrain at 115.9.
Now, this future outlook indicates that Indian investors are sanguine about next year’s prospect of Indian GDP growth.