Chief Economist at the National Stock Exchange of India
Writing at the end of 2023, it is hard not to get a feeling of déjà vu—after all, FIIs are back and in a hurry, markets have risen 5% this month, supply chains are at risk again with the Suez Canal imbroglio, and yes, COVID cases seem to be back too. Thanks to a late surge across global markets, India ends the year a US$4trn market having risen 17% this year, capping a fourth year of positive returns for the fifth largest, and fastest growing economy in the world. Tennyson’s hope for the new year seems copasetic for the Indian economy and markets.
Writing at the end of 2023, it is hard not to get a feeling of déjà vu—after all, FIIs are back and in a hurry, markets have risen 5% this month, supply chains are at risk again with the Suez Canal imbroglio, and yes, COVID cases seem to be back too. Thanks to a late surge across global markets, India ends the year a US$4trn market having risen 17% this year, capping a fourth year of positive returns for the fifth largest, and fastest growing economy in the world. Tennyson’s hope for the new year seems copasetic for the Indian economy and markets.
A resurgence in the fourth quarter of 2022 saw global equities begin the year well, until a turnaround in the inflation trajectory and expectations of a soft landing provided further wings to a ‘rate-peak’ rally that continued until the Fed reminder in July about possible further hikes. The US markets are up 24% this year, and in line, the MSCI World Index is up 21%. In contrast, the MSCI EM index has remained weak, with 4% rise, dragged down by Chinese markets that have lost 5% this year. Beyond the 18% rise this year (~17% in USD terms), 2023 has been different for Indian markets in other ways too. FIIs are back, as we mentioned above, having put in US$6.7bn in December thus far (As of December 20th, 2023), catching up to DII inflows, in turn thanks to steady and rising SIP flows, where average monthly figures have now risen above Rs 15,500 crores. Individuals seem to have taken their foot off the pedal for now, in fresh investments. That said, the number of individual investors continues to grow steadily on a yearly basis. We have over 8.35 crore unique investors in the markets today, vs. 6.94 crores as of the end of last year. Indian households have shown an increasing preference for equities over the years, with new investors from across the country.
Indian equities followed global suit and generated strong returns last month. The benchmark Nifty 50 Index rose by 5.5% in November and by another 6.6% in the first 15 days of December, crossing the 21000 mark on December 1st , 2023. In fact, India with a market capitalization of US$4trn surpassed Hong Kong to become the fourth largest equity market early this month. Global risk-on apart, robust corporate earnings and stronger-than-expected GDP growth back home, coupled with robust buying by domestic as well as foreign investors—institutional as well as retail—added to the rally. FIIs also turned net buyers of Indian equities last month, strengthening it further in December.
Indian debt, on the other hand, remained on sidelines last month, weighed down by a hawkish RBI commentary in the October policy, tighter-than-expected liquidity conditions and tightened capital norms for unsecured lending by banks and NBFCs. That said, falling global bond yields and strong buying by FIIs provided an upside support.
In terms of market activity, the average daily turnover in NSE’s cash market segment rose by 5.1% MoM to Rs 70,615 crores in November, but on top of a near 20% drop in the previous month, while that in the equity options and equity futures dropped by 12.4% and 4.5% MoM respectively to Rs 46,581 crores and Rs 1.15lakh crores respectively. Individual investors remained the dominant player with a 35% share of overall cash market turnover in this fiscal year thus far—the lowest in last eight years but much higher than the 27% share of institutional investors — domestic as well as foreign. Notwithstanding this drop, the influx of new investors and consequently higher participation in terms of number of active investors1 has gathered pace over the last few months. New investor registrations at NSE averaged at 13lakhs/month in the first eight months of FY24 vs. 11lakhs/month in FY23.
In this edition, we have also analysed the distribution of investors that traded in the equity cash and derivatives segments by turnover. Our analysis shows that nearly 79% of 37lakh active investors (That have traded at least once in the month) in the equity options segment in November traded less than Rs 10lakhs in the entire month but contributed a mere 2.5% to the total turnover. The figures are even more skewed for the cash segment. Nearly 91% of 1.07 crore active investors in the cash segment in November traded up to a total of Rs 10 lakh last month but accounted for 3.2% of the total turnover in the month.
Our Stories of the Month section presents analysis on two interesting topics. The first story on corporate performance analysis shows a strong growth in corporate earnings in the second quarter, reflecting the impact of margin tailwinds in the light of easing crude oil and commodity prices. The second story explores ownership trends and patterns in NSE listed companies since 2001. The analysis shows a pick-up in DMF share to fresh record-high level of 8.7% in the September quarter, a drop in FPI ownership to 18.4?spite strong foreign capital inflows, and an increase in individual ownership to a 16-year high of 9.7%, supported by strengthened participation. Individuals invested a net of Rs 21,560 crores in the September quarter—the highest in the last five quarters.
For the macro, in contrast with the rest of the world, the Indian economy has performed better than expectations, with growth in the first half of the year at 7.7?ing much higher than the average growth of 6.9% in the last 17 years. This translated into upward growth revisions, with the RBI raising its FY24 GDP growth forecast by 50bps to 7%. India’s resilient growth environment is also reflected in several high frequency indicators. Industrial production expanded by a 16-month high of 11.7%YoY in October (7MFY24: +7% YoY), benefiting from strong capex push by the Government. Manufacturing and Services PMI have remained well within the expansionary zone. The trade deficit—merchandise as well as services—dropped to a seven-month low of US$5.3bn in November, thanks to a strong services surplus and lower imports. Inflation trajectory has been evolving in line with expectations, with the RBI expecting the average for the year at 5.4%, moderating to 4% by the second quarter of FY25.
The global economy seems primed for a slower 2024, thanks to the delayed effects of tighter monetary policy. Inflation across the world might well be due South for now, but as central bankers would tell you, it is the expectations that matter, and at this point, it is not clear if they are under control. Despite the downward trend in core, food inflation worries persist. The RBI maintained its FY24 inflation forecast at 5.4% in the latest policy. In the geopolitical space, war continues to rage around the world, with the Israel-Hamas conflict having added to the Russia-Ukraine war that is far from over. A continued China slowdown remains a drag on the global economy; unlike the post-GFC world, the absence of a resurgent China would be felt more this time around.