The markets remained volatile during the month of January which is largely in line with broader market expectations. The upcoming elections in addition to global and local economic factors have led to this volatility. However, the long-term growth story remains intact.

With 70% of India’s GDP being driven by consumption, the labor force in India is the second largest in the world. The World Bank places India as the fourth largest consumer market in the world based on consumer spending in nominal terms.  The map indicates that only US, EU and China are able to beat India when it comes to this statistic. In addition to being the most populous nation, India’s population pyramid shows a bulge in the 25-45 age group — the key consuming demographic. Indian equities have also grown significantly surpassing that of the size of Hong Kong, which also makes the India story a compelling one.

The month of January remained flattish with the Sensex and Nifty largely remaining where they started.  However, the month also witnessed a lot of domestic buying into the markets with mutual funds witnessing inflows to the tune of INR 23,010.63 Crores. Rising bond yields in the US and the US Fed’s tapering of the interest rates has led to a slowing in the magnitude of FPI flows as they turned net sellers in the Indian mutual fund space. The month of January reflected a net outflow to the tune of INR 26111.04 Crores. Having said that, mutual funds have got a significant push from a strong SIP book and consistently growing domestic subscription.

Small and Mid-caps continued to outperform across the board, even as valuations continued to remain stretched. The cyclical nature of markets could result in a reversal of this trend in favor of Large-Caps unless small and mid-cap stocks sustain their growth by a significant margin.

Indian G-Sec yields fell by as much as 3-4% during January 2024, closing at 7.14%. Bond yields fell initially as market participants went for value buying as a result of the fall in bond prices. This trend was largely based on the proposal to include domestic bonds as part to of Global Indices. However, gains were neutralized with the central government’s decision to keep interest rates stable.

The government’s focus on CAPEX spending has been a huge push factor. Notably, the share of capex within the total expenditure has undergone a substantial increase, rising from 12.1% in FY21 to 22.2% in the budget estimate for FY24. The top five sectors in which capital expenditure was concentrated in FY23 were crude oil (12%), power (10%), telecom (10%), iron & steel (9%) and retailing (9%).

The month of January also witnessed the consecration of the Ayodhya temple, a perfect example of how improved infrastructure, technology and accessibility leads to higher levels of consumption demand across sectors. With a strong focus on infrastructure spending, India is likely to witness significant growth as domestic travel spends take a huge leap forward.

Consolidation of the banking system and cleaning up of their balance sheets, cleaner corporate balance sheets and expansionary measures continue to put focus on the India growth story.  The China +1 strategy has also been yielding a massive push to the Indian economy as global companies view China as a risky bet for their supply chains.

The Interim Union Budget paved the way for the long- term growth and development of the country. Some of our key-takeaways from the budget:

• The interim budget sets the narrative of the ‘things to come’ over the next 5 years, if the current government comes into power.
• The focus is on increased capital spending across sectors. A lower household leverage is a positive.
• Central Bank’s reform measures and steps taken to recapitalize & restructure bank balance sheets, Increased spending on infrastructure, decreasing fiscal deficit, growing tax receipts and development of sustainable agricultural methods are amongst a few highlights of the Interim Budget.

Overall, we think that the markets have likely priced in the overall impact of the upcoming elections. A major risk comes from external global macro factors in the form of crude oil prices and the impact of the Israel and Palestine tensions that have now spread to the Red Sea. This could turn into a red flag for the transportation, logistics and related sectors. Longer shipping routes and added costs could impact the Indian growth story.  However, with multiple factors that have remained in favor of the country, growth seems inevitable over the long term.

The market volatility and RBI’s policy outcome of maintaining their status quo will lead to arbitrage funds coming back into flavor as this category benefits from equity taxation as opposed to liquid funds that are taxed as debt funds. Although we poise ourselves for another volatile month pre-elections, a trend that we’re likely to witness until the election results come in, we look at this as a great buying opportunity for our clients as markets witness a correction.