What is ailing Indian markets? - 1

In the past two weeks, three key economic events took place in India. These events aim to provide material fiscal and monetary stimulus to the economy.

·         First, on top of the 50bps cash reserve ratio (CRR) cut in December 2024, the Reserve Bank of India (RBI) announced further infusion of ~Rs1.5 trillion of sustainable liquidity in the banking system.

·         Second, the finance minister Rs one trillion personal income tax concessions, benefitting over 20 million taxpayers.

·         Third, RBI embarked on a rate cut cycle after a long 24 month pause, with a 25bps cut in the policy repo rate. Besides, the RBI also decided to defer the implementation of stringent Liquidity Coverage Ratio (LCR) and project financing norms, which would materially constrict the lending ability of the banks, to at least the end of FY26.

In normal circumstances, this combination of monetary and fiscal stimulus would enthuse the financial markets by igniting the risk appetite of investors and traders. However, this time the markets have mostly ignored the stimulus measures. After some momentary excitement, the markets (equity, bonds and currency) are mostly continuing with their weak trend.

·         Benchmark equity indices are back to their pre-budget levels. Even Nifty Consumer and Nifty Bank – the sectors that were supposed to be primary beneficiaries of the fiscal and monetary stimulus are trading almost at pre-stimulus levels.

·         The benchmark bond yields are back to the pre-budget levels.

·         USDINR is weaker by over one percent in the past couple of weeks.

·         Foreign portfolio investors (FPIs) are persisting with their exit strategy, and have been net sellers in India (including equity and debt) during the months January and February.

·         Stock market volumes are much below one-year average levels.

Obviously, the present circumstances are not normal. It is therefore worthwhile to examine whether Indian markets are passing through a “bear phase” or it is just a “pause” in a secular bull market or a “corrective decline” after a strong bull market. In my view, it is critical because the investment strategy response to these three scenarios is usually very different.

·         In case we are in a bear phase, the strategy should be to underweight risk; focus on safeguarding capital rather than return; orient portfolio towards larger, stronger companies that are more likely to survive through a prolonged rough patch; completely avoid leverage; and consolidate holdings into fewer strong companies.

·         In case it is just a pause, in a secular bull market, the strategy should be ignored the noise and hold on to the growth stocks. This opportunity may be used to rebalance the portfolio for any excesses and deficiencies.

·         In case it is a corrective decline after a strong bull run, investors/traders should be continuously looking for excessive negative price action in good stocks and use the opportunity to buy more using leverage; and overweight risk.

More on this tomorrow.