The surging Indian stock market has decoupled from the country's ailing economy.
The country's NSE 50 index rose to a record in the special trading session that marks the start of the Hindu year, and has gained 18 per cent since end-August when worries about the currency and capital flight were at their height. Foreign investors are driving the rally: they bought a net Rs 13,000 crore ($2 billion) of stocks in September after selling nearly twice as much in the previous three months.
It's hard to square up investor optimism with the broader economy, however. New orders for companies have been falling for four months now, HSBC's surveys of purchasing managers show. Meanwhile, poor tax collections are putting the government's full-year budget deficit target at risk. The burden of lowering stubbornly high inflation is thus on the central bank. A tighter monetary policy will do the job, but GDP growth, already at its lowest in a decade, could slow some more.
Even then, fund managers have their reasons to prefer Indian equities to better-performing emerging markets that now look expensive. At 19 times trailing earnings, stocks in the Philippines are 22 per cent costlier than in India.
The US Federal Reserve's decision to delay mopping up dollar liquidity has eased concerns about how India will finance its large trade deficit. The rupee has stabilised after slumping 22 per cent between May and August. Outsourcing companies like Tata Consultancy and Infosys are benefiting from a more competitive currency and an improving US economy.
But the struggle for domestically focused companies is far from over. At UltraTech, the country's largest cement maker, net profit halved in the three months to September. Sales growth at Hindustan Unilever, India's biggest consumer goods manufacturer, slowed for a sixth straight quarter. ICICI Bank beat earnings forecasts but warned of worsening asset quality.
More intrepid investors, though, aren't deterred. For them, this might be the last opportunity to dabble in India before polls next year. If voters elect a stable, pro-business government just as inflation is beginning to recede, a limping economy could catch up with speeding markets. It's an enticing gamble, though perhaps a tad too risky for widows and pensioners.
The country's NSE 50 index rose to a record in the special trading session that marks the start of the Hindu year, and has gained 18 per cent since end-August when worries about the currency and capital flight were at their height. Foreign investors are driving the rally: they bought a net Rs 13,000 crore ($2 billion) of stocks in September after selling nearly twice as much in the previous three months.
It's hard to square up investor optimism with the broader economy, however. New orders for companies have been falling for four months now, HSBC's surveys of purchasing managers show. Meanwhile, poor tax collections are putting the government's full-year budget deficit target at risk. The burden of lowering stubbornly high inflation is thus on the central bank. A tighter monetary policy will do the job, but GDP growth, already at its lowest in a decade, could slow some more.
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The US Federal Reserve's decision to delay mopping up dollar liquidity has eased concerns about how India will finance its large trade deficit. The rupee has stabilised after slumping 22 per cent between May and August. Outsourcing companies like Tata Consultancy and Infosys are benefiting from a more competitive currency and an improving US economy.
But the struggle for domestically focused companies is far from over. At UltraTech, the country's largest cement maker, net profit halved in the three months to September. Sales growth at Hindustan Unilever, India's biggest consumer goods manufacturer, slowed for a sixth straight quarter. ICICI Bank beat earnings forecasts but warned of worsening asset quality.
More intrepid investors, though, aren't deterred. For them, this might be the last opportunity to dabble in India before polls next year. If voters elect a stable, pro-business government just as inflation is beginning to recede, a limping economy could catch up with speeding markets. It's an enticing gamble, though perhaps a tad too risky for widows and pensioners.