India is by no means immune to this tsunami of depressing data. India's stock-market indices have fallen by 20 per cent in the past 10 months. The Sensex and Nifty are trading at 20-month lows, close to the levels prevailing when the current government took charge in May 2014. The rupee is also trading at two-year lows. Growth has not accelerated much since Narendra Modi was sworn in as the prime minister, what with rural demand being impacted by successively poor monsoons. The only silver lining has been lower fuel prices. The Nifty and the Sensex closed out May 2014 at 7,230 points and 24,217 points respectively. At the end of January 19, the Nifty closed at 7,435, while the Sensex was at 24,480. The apparent lack of change is deceptive. It masks violent swings in both directions, which have effectively cancelled each other out. In May 2014, the stock market experienced one of its frequent bouts of euphoria, surging by eight per cent, when it became apparent that the Bharatiya Janata Party would win. The bull run topped out in March 2015, when the Nifty and Sensex hit all-time highs (the Nifty touched 9,119, the Sensex 30,025). Since then, it's been downhill. The correction has now turned into a rout with the market down seven per cent in 2016.
In the current financial year, a trend of continuous selling by foreign portfolio investors has been partially counterbalanced by buying from domestic institutions and retail investors. In particular, strong retail sentiment propped up the market for several months. However, retail sentiment may have completely broken down in the past few weeks - at least, if one goes by heavy selling in small stocks where there is little or no institutional presence. Anecdotally, mutual funds have also seen a tapering off of retail subscriptions in January. Volatility apart, it could be argued that the correction is rational. While India will be among the faster growing economies this year, the Nifty is trading at a current price-to-earnings ratio of about 20 - high, given that earnings growth is expected to be in the mid-single digits. Future drivers of economic growth are also hard to discern. In terms of sentiment, India remains hostage to China since global investors are unlikely to favour emerging market exposure until China settles down. The pain, therefore, could continue in the short term. Retail investors usually swayed by deteriorating sentiment could easily choose to exit equity and head back into unproductive assets like gold. But lower prices will eventually make valuations attractive.