Chief Economist at the National Stock Exchange of India
Markets across the world reached life-time highs or levels close, in the last two months, as a renewed surge into equities led the US S&P500 to the 5000 mark earlier this month, and then 5100. European markets followed suit, and the Japanese Nikkei 225 has finally crossed the significant 39000 mark, crossing levels last seen in December 1989. Indian markets too have breached life-time highs in February, but unlike the concentrated Tech-fuelled (read Nvidia’s blockbuster quarterly earnings) boom in the US markets, the rally has been more secular, with meaningful participation from small and midcaps. Resilient third quarter earnings, GDP growth beating expectations—leading to upgrades, due South inflation and a fiscally prudent Budget 2024 (Our story of the month) have contributed to the positive outlook on Indian markets. As markets have continued to hit new highs, the overall number of new investors in India continues to rise and is likely to cross the 9-crore mark soon, a far cry from 2.7 crore in 2019. The 8-crore mark in September last year had taken eight months; with 8.8 crore investors as of Jan’24, it would be less than six months for the next crore.
New investors to markets do not necessarily translate into flows. For this fiscal, cumulative flows from individual investors as a category had been negative, yes, below zero, in contrast to the steadier inflows through SIPs. January’s figures point to a different story; the return of the market benchmark NIFTY50 to new highs seems to have attracted capital again. Retail investors pumped in over Rs36000 crore in the first month of the calendar year, trumping every category, including DIIs. We have more detail in the section on category-wise participation in the markets. Beyond direct participation, January 2024 also saw the highest ever SIP inflows of Rs18,838 crore. The indirect channel for investors has seen renewed interest in passive funds. For instance, non-gold ETFs were the second choice for investors in 2023, after arbitrage funds. Passive fund AUM in India is likely to hit the Rs10 lakh crore mark soon and would be a fifth of overall MF AUM.
Of the 8.8 crore investors in the Indian markets, North India now has 3.1 crore, West India 2.8 crore, while South and East have 1.8 and 1 crore respectively. Among states, Uttar Pradesh with 93 lakh investors would soon be the second state with over a crore investors, after Maharashtra.
New investors to the markets also translated into higher participation. December 2023’s 1.26 crore investors were the highest ever, beating the earlier record of 1.13 crore in January 2022. With over 1.44 crore investors, January 2024 is meaningfully higher. With 47 lakh participants in the month, it’s a lifetime high for the derivative markets as well. Beyond participation, trading activity in the cash and derivative markets continued to rise. After December 2023 saw average daily turnover (ADT) cross Rs100,000 crore for the first time, January saw activity rise further to Rs111,000 crore. Reflecting rising in passive funds, the ADT in ETFs also crossed Rs1000 crore for the first time. More on these in our Market Activity section.
Back to the markets, global equities had a mixed start to the new year, with developed equities continuing to advance in January, albeit at a slower pace, while emerging equities ending the month in the red. Strengthening signals from global central banks, particularly the US Fed, that rate cuts may come through later than previously expected, weighed on investor sentiments. Developed equities (MSCI World Index) registered a modest gain of 1.1% in January (YTD: +3.3%, as of February 21st, 2024), while Emerging equities (MSCI EM Index) ended the month with a loss of 4.7% (YTD: -0.3%), with the latter weighed down by continued sell-off in Chinese equities (Accounting for 24.9% of the Index). Notwithstanding the recent slip to 4th place in size (GDP), Japan’s equity market is back at peak after 34 years. Despite support from the central bank, and aggressive foreign buying, Japanese households are allocating 90% of their equity investments to the US and other markets. ETFs based on the NIFTY also gained, with their total AUM in Japan having recently crossed US$1bn. Global debt also took a breather in January after a strong rally in the last quarter of 2023, weighed down by a hawkish Fed commentary and stronger economic data in the US. The US 10-year yield hardened by 46bps in 2024 thus far to 4.3%, while that in the UK and Europe rose by 57bps and 41bps to 4.1% and 2.4% respectively. We have more detail in the Market Roundup section.
From a macro perspective, the MPC kept rates unchanged in its bimonthly meeting in February, but it is increasingly clear that we are near the end of the transmission cycle. The headline CPI forecast for FY24 is maintained at 5.4% and expected to drop to 4.5% the following year. RBI expects growth in FY25 to be at 7%, marginally lower than the First Advance Estimate of 7.3%. With the growth surprise seen in the past three quarters, this would be an interesting figure to watch. The IMF has already upgraded its FY24 growth estimate for India from 6.3% to 6.7% and expects 6.5% the following year. Apart from this, headline CPI in January at 5.1% was benign, with softening vegetable prices and core inflation fell to a three-year low of 3.6%, probably necessitating the MPC call of remaining vigilant on inflation. Wholesale prices remained soft—with the WPI at 0.3%. The merchandise trade deficit in January dropped to US$17.5bn, while the Services segment remained in surplus of US$16.8bn. More in our macro section.
In the end, it would bear mentioning Nvidia again. Not just due to the 265% jump in quarterly revenues, but as another milestone in this Age of AI. From a market standpoint, the chip alone has purportedly contributed a trillion dollars of value, but we are more interested in the broader implications. Beyond machine learning, the advent of Generative AI through these chips points towards a vastly larger general audience, and the prospective growth trajectory may not be entirely understood. To begin with, solutions can be invaluable to individuals using public data in terms of improved productivity, but even more so to companies on their own, proprietary data. The demand of these chips, used for AI model training and inference, is reflective of this promise. The biggest customers of this company for now, are the cloud computing providers. As we are aware, the performance of these models rises with the data made available to them. Beyond the corporate universe, no country can afford to ignore the benefits of such models with population scale data. Countries like India can lead the world in this space, given its obvious scale and the pioneering use of technology as a public infrastructure in a responsible manner
The latest Household Consumption Expenditure Survey (HCES) released by the government points to the narrowing gap between the rural and urban sectors of the Indian economy. Rural consumption has grown faster than urban in the past decade, with the average Monthly Per Capita Income (MPCE) gap between the two sectors narrowing to 71.2% in 2022-23 vs. 83.9% in 2011-12. Further, the survey—conducted over 261,000 households in the country—expectedly points to falling share of food in the consumption basket over the years. For the urban areas the share has dropped to 39.2% (vs. 42.6% in 2011-12) and for the rural areas it’s 46.4% (vs. 52.9?rlier). These considerations would matter for a revised CPI basket when available; our current inflation calculations are based on a 2011-12 basket. For the urban population, consumption in the top 5% is ~Rs21,000, i.e., annual consumption of slightly over Rs250,000. These numbers point to an economy that has changed materially over the years and is now seeing the results of prudent policy decisions.