Indian Stock Markets at a high when economic indicators are down

India’s economy may be faltering, but its $2.1 trillion stock market has been powering to new highs as foreign investors pile into country’s shares, betting the worst may have already passed.

Economic growth is at the lowest since before Prime Minister Narendra Modi came to power in 2014. The economy expanded 4.5% in July-September, slowing for a sixth straight quarter as deteriorating local consumption, troubled banks and a weak global outlook all took their toll.

But the equity market? Now, that’s a different story. The S&P BSE Sensex Index surged 13% from a low on September 19 as it rose to all-time highs. Foreigners purchased a net $5 billion, give or take, of the country’s shares so far this quarter, while domestic investors have remained buyers of equity funds.

Except for the US markets, bond yields in half of the European markets and Japanese markets are having negative yields. When debt is so cheap/you’re paid to borrow, investors will borrow excessively. The bond yields in India are hovering around 6.6–6.8%.

Also, when markets are reaching all-time high it is mostly just Sensex and Nifty that is touching highs. Components of Nifty and Sensex are those large MNCs. Even among the large caps, only a handful of stocks are driving gains(See Graph). This, in turn, is driving the markets up. If you consider midcaps and small caps, value has been eroded.

Use common sense, if a European investor wants a good yield, he will borrow and invest in a market that will provide reasonable returns at low risk. That place risk-adjusted returns appear juicy is in India. Assuming even if he invests 6–7 high-quality stocks constituting the Sensex, he will easily earn a minimum 6% return(more demand will increase volumes and hence value). Now, the fun part is because of this FII investment, the rupee has not depreciated a lot in the last month. It about the same level (~71.50). Hence, it won’t even erode investment value for the investor.

What is happening right now is just a liquidity based rally driven by FIIs and not DII.

Once FII starts selling, it will reminiscent of the Rupee Tantrum. It is at this point when the Sensex may start hitting lows.