Why India is set to regain its status as the Sone Ki Chidiya

This article was penned by Amisha Vora, Chairperson & MD, PL Group, for the Bombay Stock Exchange Brokers’ Forum (BBF).

In 2023, India became the first country to have completely transitioned to a T+1 Settlement Cycle. None of the global peers, not even China and the mighty US, have been able to achieve this milestone.

This is just the latest addition to India’s record-breaking spree. In 2022, our equity markets hit new all-time highs and remained among the best performing markets in the world. While the world markets were tanking, our benchmark indices rose ~4.3%.

Source: Bloomberg; Return data is in local currency

Further, the demat account tally surpassed the 100 million mark, trading volumes soared, SIPs created new record-highs and stayed above the ₹13,000 crore mark, and mutual fund folios hit new highs at 14.11 crore.

Hard to imagine that just around 32 years ago, brokers had to rely on the outcry system and use hand gestures to buy or sell shares in the iconic trading ring at the BSE – Asia’s oldest stock exchange.

The Indian Capital Market has indeed come a long way. And it has a highly promising road ahead. Let me delve a little deeper into 6 key tailwinds for our markets.

#1 Robust Economic Growth

At a time when the global economy is facing severe slowdown, India was among the fastest growing major economies in the world. This outperformance is likely to continue, aided by strong infrastructure push, rapid digitisation, robust domestic consumption, renewed focus on the China+1 strategy, and global supply-chain realignment.

Favourable policy support and aim to achieve Atmanirbharta are fuelling economic growth. For instance, the Production Linked Incentive (PLI) schemes currently cover ~14 sectors and have attracted investments of more than ₹45,000 crore. This will increase the contribution of these sectors to the GDP, boost exports and also create jobs.

Our economic growth is backed by strong fundamentals:-

  • Fiscal consolidation underway: Target for FY23RE and FY24BE pegged at 6.4% and 5.9%, respectively
  • Improving bank asset quality with lower NPAs: Gross NPAs fell to a seven-year low of 5% in September 2022
  • Credit growth: At a decadal high of 17.4% as on December 16, 2022
  • Inflation cooling off: At a 12-month low of 5.7% in December 2022

Our economy is thus set for a robust growth in the coming years. By 2027, the Indian economy will cross $5,619 billion, from $3,534 billion in 2022. With this, it will surpass Japan, Germany and the UK!

  Economic Growth Path

Source: CMIE, Bloomberg

Data shows us that when countries such as Japan, South Korea, and China witnessed high growth periods, it had a positive impact on their capital markets as well. Essentially, economic and market growth go hand in hand.

Source: World Bank, IMF

So, with a multi-decadal growth journey ahead – ‘Amrit Kaal’ as stated by our Hon. Prime Minister Narendra Modi – the Indian markets will remain a highly attractive investment opportunity for Foreign Institutional Investors (FIIs), Domestic Institutional Investors (DIIs), and Retail Investors.

#2 Golden Age of Demographics

India has surpassed China to become the most populous country in the world. The best part is, around 45% of India’s population is in the age group of 20-49, and it will remain above 40% till 2050. A bigger pool of working age population means higher disposable income, which fuels consumption, production, and economic growth.

Already, the markets are witnessing a sharp influx of millennial, first-time investors. This is likely to rise sharply as more and more young Indians join the workforce and start investing in the stock markets to create wealth.

Source: Population Division of United Nation

#3 Sought after Investment Destination

The Indian markets offer a vast array of domestic and MNC companies across sectors for investment. It is also a play on the 1.4 billion strong population and a fast-emerging middle class, with among the best growth opportunities globally. This makes India a preferred destination for FIIs.

We believe that despite near-term volatility, FIIs will make a comeback given the favourable policies to boost growth, expected growth in per capita income, and strong consumption.

Source: World Bank, Bloomberg, CDSL
FY23* till Feb 6, 2023

#4 Retail Participation

Unlike foreign investors, the retail participation has been steadily on the rise. The share of retail investors in the companies listed on the NSE hit an all-time high in 2022 to 7.4%. Also, data shows that retail investors now account for 52% of daily transactions, while DIIs and FIIs account for 29% and 19% respectively.

In fact, the reliance on FIIs has been gradually declining. A Crisil report notes that in terms of Assets Under Custody (AUC), the total holding of the domestic investment industry is at ₹135 lakh crore. In comparison, the FPI holding stands at just ₹51 lakh crore.

Source: Crisil

Another aspect to consider here is that despite increasing participation, the penetration of financial services continues to remain in low single digits. This underpenetrated market, coupled with increasing accessibility to trade and invest and strong economic outlook means that the Indian markets have a huge runway to grow.

#5 Financialisation of Savings

Financial inclusion, improved access to banking channels, digital transactions, and the SIP route have led to increasing retail participation. This, in turn, leads to financialisation of savings. It means a change in mindset – wherein more and more people prefer to invest in equity as compared to traditional avenues like gold and fixed deposits.

The financialisation of savings rate of Indian households is one of the highest in the world. At the end of 2021, the domestic savings rate stood at 29.3%, higher than the global average of 26.9%. In the past couple of years, more household money is flowing into the capital markets, while the share of bank deposits is declining, as stated in the Crisil report.

Also, the report states report that the investment industry (with ₹135 lakh crore of assets) has grown at a 16% CAGR in the past five years, as compared to bank deposits which grew at 10% CAGR.

Source: Crisil

#6 Better Monetary Dynamics

With front loading of interest rate hikes and inflation contained, emerging markets have either positive real interest rates or less negative interest rates than developed markets. This means that the central banks in the Emerging Markets have greater flexibility to focus on lowering rates to support domestic growth rather than increasing interest rates.

Country Central Bank Rate
Real Central Bank Rate
Brazil 13.7% 5.8% 8.0%
Hong Kong 4.7% 1.8% 3.0%
Mexico 10.5% 7.8% 2.7%
China 3.6% 1.8% 1.9%
Saudi Arabia 5.0% 3.3% 1.7%
India 6.2% 5.7% 0.5%
Indonesia 5.5% 5.5% 0.0%
South Africa 7.0% 7.4% -0.4%
Peru 7.7% 8.5% -0.7%
Taiwan 1.7% 2.7% -1.0%
Colombia 12.0% 13.1% -1.1%
Malaysia 2.7% 4.0% -1.3%
South Korea 3.5% 5 -1.5%
Chile 11.2% 12.8% -1.6%
US 4.3% 6.5% -2.1%
Canada 4.2% 6.8% -2.6%
Philippines 5.5% 8.1% -2.6%
Australia 3.1% 6.9% -3.8%
Japan -0.1% 3.8% -3.9%
Thailand 1.2% 5.9% -4.6%
Eurozone 2.0% 9.2% -7.2%
UK 3.5% 10.7% -7.2%
Turkey 9.0% 64.3% -55.3%

 Source: FRED

Looking ahead:

The government has delivered a highly pragmatic and growth oriented budget. Focus on rural & agri development, capex, and ecosystem of clean energy will all have a positive impact on economic growth and the markets.

The near term volatility may remain. But that is largely because India has been among the best performing markets last year and is relatively expensive than many other competing markets.

However, I firmly believe that India is well-placed due to the above mentioned factors. In our view, the sustained capex and soaring PAT of the Nifty50 companies will fuel the growth of the Indian capital markets in the coming years.

The nominal GDP is expected to be ₹652 lakh crores by 2030, from  ₹273 lakh crores in 2022, at a nominal growth rate of 11.5% per annum.

Currently, the equity market capitalization of India as a percentage of GDP is 98.5%, with the absolute market cap at ₹ 269 lakh crores. So, from its current levels (17,600), we expect Nifty to reach 42,000 by 2030 if it grows at the same rate as expected growth rate of GDP.

Mcap / GDP ratio Mcap in 2030

(in Lakh crores)

Mcap CAGR Nifty in 2030
100 652.0 11.5% 42,034
110 717.2 12.8% 46,237
120 782.4 14.1% 50,440

Source: IMF, World Bank, PL calculations

We are truly fortunate to witness these grand inflection points and milestones in India’s growth journey. And as India regains its status as the Sone ki Chidiya, the Indian capital markets too will continue their upward trajectory and create new milestones.

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