Indian stock markets get a band-aid, but chronic pain remains

The thumping victory of the Bharatiya Janata Party and its allies (Mahayuti) in Maharashtra assembly election means political stability with more synchronization of economic policies between the Centre and the state. The Mahayuti coalition’s promise of increased focus on planned urban development in Mumbai bodes well for real estate developers, construction, and infrastructure stocks. Moreover, developments in the economically significant state tend to shape foreign investors' perceptions of India.

On Monday, benchmark indices Nifty50 and BSE Sensex rose over 1% each. True, improved investor sentiment is a given after the Maharashtra state election, but ongoing fundamental challenges cannot be ignored. Foreign portfolio investors have been on a selling spree, offloading Indian stocks worth ₹21,840 crore in 2024 so far, showed NSDL data.

The recently concluded September quarter (Q2FY25) earnings do not bring good tidings. Profit after tax growth for BSE500 companies (excluding oil marketing companies) slipped further to 8% from 10% in Q1FY25 and 21% in FY24 with most sectors barring BFSI posting a sharp slowdown, showed an analysis by Nuvama Research. Blame the fading input cost benefits here. Revenue growth of just 6% in Q2FY25 makes it the sixth consecutive quarter of sub-10% growth, added Nuvama. 

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Consumption has emerged as a weak link, while select segments of banking and financial services are seeing asset-quality stress. Weak government spending in the first half of FY25 along with excess rainfall impacted demand. Further, a strain on cash flows of companies due to delayed government payments was also seen. Consequently, brokerages have cut earnings per share estimates for FY25 and FY26. Earnings recovery in the second half of FY25 hinges on government capex, festive demand and easing of commodity prices.

Meanwhile, at a macro level, inflation is rearing its ugly head again. India's retail inflation rate rose to 6.21% in October from 5.49% in September, mainly due to high food prices. This marks the first time since August 2023 that retail inflation exceeded Reserve Bank of India (RBI)'s comfort zone of 6%. The surge is likely to weigh on the prospects of an interest rate cut by RBI. Some economists now expect the monetary easing cycle to begin from April onward versus December earlier.

India’s Q2FY25 gross domestic product data scheduled to be released on 29 November will also be in focus. Interestingly, an analysis of 100 growth indicators by HSBC Global Research showed that a majority 55% of the Indian economy continues to grow positively, but a quarter ago, this number was closer to 65%. While investment activity (especially construction and public sector led) is holding up, consumption related ones are slowing, said the HSBC report on 14 November. Also, in a scenario of shift towards populist policies by state governments, India's consolidated fiscal deficit may come under stress. 

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For now, sluggish earnings growth, rising inflation and relentless FII selling have put the Street's complacency to test. Nifty and Sensex have corrected by 7% and 6% each in the last two months. Fear gauge, the NSE Volatility index, rose 14% in this span.

Globally, geopolitical tensions lurk amid weak economic growth outlook. Any potential trade policy changes by US president Donald Trump’s would be keenly watched. A stronger US dollar is posing a risk for emerging market equities after Trump’s victory. Amid this, India’s pricey valuation hardly helps. At a one-year forward price-to-earnings, India is trading at a multiple of 21x, a premium to Asian peers, showed Bloomberg data. 

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