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India’s economy continues to grow at a pace that many large economies would envy. Corporate India is not uniformly showing signs of a profit slowdown either. Yet the stock market has spent much of the past few months moving in the opposite direction.
The Nifty 50 and Sensex have gone through an extended losing streak, with the market recently recording eight consecutive weekly declines — its longest such run in 25 years. September alone saw the Nifty fall about 6%.
That divergence is what makes the current correction worth examining.
A falling stock market does not necessarily mean that the economy is weakening. Nor does strong GDP growth automatically translate into rising share prices. Equity markets are influenced by earnings expectations, valuations, interest rates, currency movements, global liquidity and the relative attractiveness of competing markets.
At present, several of those variables are moving in an unfavourable direction for Indian equities.
The most visible pressure has come from foreign investors. After buying heavily in July and August, foreign portfolio investors turned sellers in September, withdrawing ₹35,860 crore from Indian equities. They continued selling into October, with another ₹9,232 crore pulled out on October 1.
Other estimates put the scale of the foreign withdrawal much higher over the first nine months of the year, with FPIs selling more than ₹3 lakh crore. Rising US bond yields and geopolitical uncertainty have been identified as important factors behind the shift.
For the Indian market, this matters because the issue is not simply whether foreign investors like India.
They are comparing India with everything else available to them.
When US Treasury yields rise, the return available from relatively safe dollar assets becomes more attractive. The hurdle for investing in emerging-market equities therefore rises. India, where valuations have remained relatively high, has to compete not only on economic growth but also on the expected return after accounting for currency and market risk.
That calculation can change without any deterioration in India’s underlying growth rate.
The global backdrop has changed
The pressure on Indian stocks has also coincided with a broader risk-off environment.
US Treasury yields have climbed sharply, with the 10-year yield around 5.3% in recent trading. Asian markets have also come under pressure as investors reassess the outlook for global interest rates.
This matters because monetary policy affects equities through more than the cost of borrowing for companies.
Higher interest rates change the valuation investors assign to future profits. When the risk-free return available from government bonds rises, investors can demand a higher return from equities as compensation for taking additional risk.
That can put pressure on valuations even when corporate earnings themselves remain healthy.
And India is now dealing with that pressure domestically as well.
The Reserve Bank of India raised its repo rate by 25 basis points to 5.5% on October 7 and shifted its policy stance from neutral to “calibrated tightening”. It was the first rate increase in nearly four years.
The rate decision came as crude oil prices moved above $100 a barrel, adding another complication to the inflation and currency outlook.
Oil changes the equation
For an economy that imports most of its crude oil, a sustained rise in oil prices has implications well beyond the energy sector.
Higher crude prices can increase the import bill and put pressure on the rupee. They can raise transportation and input costs for businesses and, if sustained, make the inflation outlook more difficult.
Brent crude was trading around $102.5 a barrel on Thursday, with Middle East tensions contributing to the increase.
The market therefore has several variables to process simultaneously: higher oil, a weaker currency, elevated global yields and tighter domestic monetary policy.
None of these, by itself, explains the entire correction.
Together, however, they alter the environment in which stocks are valued.
The IT question is different
The IT sector has attracted particular attention because it sits at the intersection of two very different narratives.
On one side is the continuing expansion of spending on artificial intelligence, cloud computing, data and digital transformation. On the other is the possibility that AI and automation could change the traditional economics of technology outsourcing.
That has created uncertainty around the future growth of India’s large IT-services companies.
But it would be too simplistic to make AI the explanation for the broader market decline.
The recent market behaviour itself illustrates why. On October 8, while the Nifty and Sensex were falling, the IT index gained 1.8%, with TCS, HCLTech, Tech Mahindra and Infosys among the stocks providing some support. TCS rose ahead of its quarterly results.
The IT sector has also responded positively at times to evidence that AI could generate new technology spending. The Nifty IT index rose around 1.6% on October 5 after Accenture’s results and outlook reduced some concerns about technology spending and AI disruption.
So the IT story is better understood as a debate over the composition and durability of future growth, rather than evidence that the sector is responsible for the market’s decline.
Valuations remain part of the calculation
There is another less dramatic but important element: the price investors were paying for Indian growth.
Indian equities have traded at a premium to many other emerging markets for years, partly reflecting expectations of stronger economic and corporate growth.
That premium does not disappear simply because GDP growth remains strong.
But when global yields rise, foreign investors sell and uncertainty around future earnings increases, investors may become less willing to pay the same multiple for those earnings.
This is where the distinction between the economy and the stock market becomes important.
A company can report a profit and still see its share price fall if investors had expected a larger profit. A sector can continue growing and still underperform if its valuation was already pricing in much of that growth.
The market is therefore dealing with expectations as much as with current results.
Domestic money is providing a counterweight
Foreign selling has not translated into an equivalent collapse because domestic investors have become a much larger force in the Indian market.
On October 7, FIIs sold ₹6,121 crore of equities, while domestic institutional investors bought ₹4,597 crore. Earlier in October, domestic institutions had also been net buyers while foreign investors were selling.
This domestic flow has provided a degree of support.
It also makes the current correction different from earlier periods when foreign capital movements had a much larger influence on the direction of Indian equities.
But domestic buying cannot eliminate the forces affecting valuations. It can change the pace and depth of a correction without necessarily changing the underlying variables driving investor decisions.
What comes next
The next important test is corporate earnings.
The quarterly results season has begun with TCS, and investors will be looking beyond headline profits. Revenue growth, margins, deal wins, management guidance and commentary on demand will matter.
The same applies across the market.
If earnings growth remains healthy, that provides one piece of evidence for current valuations. If earnings expectations are revised downward, investors may reassess the prices they are willing to pay.
At the same time, the trajectory of crude oil, US Treasury yields, the rupee, foreign flows and domestic interest rates will continue to influence the market.
That leaves India with an unusual market backdrop: strong economic growth on one side, and a more complicated global and financial environment on the other.
The two are not necessarily contradictory.
The growth story is a measure of the economy. The stock market is a measure of what investors are willing to pay for a claim on future corporate earnings.
At the moment, those two measures are moving differently. Understanding why requires looking beyond the day’s fall in the Sensex or Nifty — and at the changing price of risk around India’s growth story.
These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint.