Indian economy linked to world, decoupling not possible in reality: Analyst

The Indian market has chartered a divergent path with most world markets over the past three months. To illustrate, the benchmark Sensex is up 7 per cent over the past three months even as the MSCI World index has declined 7 per cent.

A note by Kotak Institutional Equities says this decoupling can only be a short-term phenomenon. “We note that markets may decouple in the short term (for whatever reasons) but economic linkages will inevitably result in some ‘relationship’ between markets too. The Indian economy is too interlinked with the global economy for economic or market decoupling in reality. A global slowdown will have severe repercussions for India’s balance of payments BoP through lower exports; a meaningful slowdown of late and lower capital inflows.

Then what explains India’s recent outperformance?

India’s strong outperformance “probably reflects investors’ belief that the Indian economy is in a relatively stronger position versus other economies. This may be true for growth but not so for other macroeconomic parameters (BoP, fiscal, inflation). Also, India’s post-Covid-19 economic recovery has been subpar so far. We see recovery in household and private capex (product-linked incentive schmeme will start in earnest from the 2025 financial year or FY2025) but our earlier excitement has subsided a little, given global slowdown and domestic inflation issues.”

Most global markets have been roiled by the US Federal Reserve’s (Fed) hawkish stance and strong resolve to bring down inflation even at the cost of growth this year. Fed chairperson Jerome Powell’s comments at the Jackson Hole Symposium have triggered fresh bout of volatility in risky assets. The US market has declined more than 5 per cent in the past fortnight while the Indian market has remained flat during this period.

The outperformance has led to widening of India’s valuation premiums with other emerging markets. Also, on a standalone basis, the Nifty50 trades at nearly 22 times its estimated earnings for FY23.

“We are not sure if the Indian market is factoring in risks from short-term factors such as higher for-longer inflation, unlike other markets. Indian market valuations are quite expensive. Earnings yield is low, relative to bond yield, when compared with periods with similar levels of bond yields. Lastly, increasing medium-term risks linked to climate change and geopolitics warrant higher cost of equity,” the KIE strategist led by Sanjeev Prasad said in the note. Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd