Globally, this year, markets have been rising sharply in major markets. This is in spite of the wars in Ukraine and Gaza, and the turmoil caused in global trade arrangements by Trump's tariffs.
Normally, such events would have caused significant drops in equities as investors fled to safer, more stable securities. Therefore, the rise in Indian markets has not been an exception.
A number of explanations have been offered for this phenomenon. The first is that the huge quantitative easing that started during Covid has meant that markets have been awash with liquidity. No major economy has sucked back the huge liquidity overhang. This has led to huge asset inflation – again, globally. The other reason is that in the last 12 months, the promise of AI had led to gigantic sums of money being raised, particularly in the US, for gigantic data centres and the energy infrastructure needed to run these data centres. And for the whole host of AI companies that need this computing power. The valuations of companies like OpenAI, Anthropic, Perplexity have reached levels never seen before, as also companies like Nvidia whose GPUs are key to processing data. Many fear this is a repeat of the dotcom bubble, on a larger scale. Yet many believe that we are just at the beginning of the AI revolution, and therefore, the valuations of the potential winners are not excessive.
Many also argue that despite all the noise about tariffs by Trump, after all the backtracking and discussions with each country, the actual tariffs being levied have settled to around 10 per cent, which for the time being has been absorbed by sellers and the trade, and little has yet been passed on to the consumers in US, and hence inflation, so far has been under control.
While global events and money flows have been of great importance in the past for Indian markets, today, foreign investors account for less than 17 per cent of the Indian markets. It is the domestic investors and institutions that have at last regained their due importance. The equity cult has spread wider and deeper across the country (though participation in equity markets is still very low by global standards). Investment in SIPs is growing steadily every year. In the coming years, there is little chance of it going down, and it will only increase year after year. Alongside, we see an ever-growing number of individual investors who prefer to invest directly in the markets. Together, this year has seen a record number of high-quality companies, including several that were just start-ups a few years ago, entering the capital markets, offering new profitable avenues of investment.
All these put together have meant a great year for the Indian stock markets. And at Business India, we see that this is likely to continue for several more years. Of course, there is the usual common-sense warning that there will be short-term corrections along the way, and individual companies will slip back. But even if India continues to grow at only 6 per cent, markets have historically grown at twice the rate of the GDP. Hopefully, the Modi Government will achieve a higher rate, which is well within our reach, and in that case, equity markets can only grow faster.