Financial Insights That Matter
A modest recovery in private investment: While modest consumption demand has been one of the factors driving low private sector investments, global uncertainties about future trade, investment outlook, and changing technology and its impact too had dampened investors’ sentiments. Subdued corporate profits have further exacerbated the slowdown in GFCF.
We believe that even private investments are likely to turn around soon.
- A rebound in government capex spending will crowd in private investments.
- Consumer spending has now grown consistently for two consecutive quarters and the festive quarter will likely keep the momentum up.
- Industrial capacity utilization has been relatively high.
- Capital markets are resilient despite global market volatility.
Resilience in the capital market amid foreign volatility
Capital markets are critical for accessing funds at lower costs, facilitating expansion, innovation, and risk-taking, and their stability fosters a conducive environment for business investments. However, the last two months have seen extreme volatility in markets due to a strong pullout of foreign institutional investors from the markets.8
October 2024 was a record month for the Indian market, as foreign institutional investors (FIIs) recorded their sharpest withdrawal since March 2020. FII assets under custody in equities dropped by 9.1% to US$846.1 billion, down from US$930.4 billion a month ago.9 Notably, before October, the last major sell-off by FIIs occurred during the COVID-19 market crash. The trend continued in November and partly in December, albeit at a moderate pace.10
A similar trend was observed in other emerging nations as well.11 Investors reacted to various factors such as China’s economic stimulus measures, weaker-than-expected corporate earnings for the quarter, and geopolitical uncertainties surrounding the US elections. These factors contributed to a correction in India’s stock market, reducing the median price-to-earnings ratio from 24 to align closer to the long-term average of 21.9.12
What is notable is that despite sharp outflows of FIIs over the past two months, the Indian capital market demonstrated notable resilience. The decline in market indices was notably less severe compared to previous episodes of FII outflows and volatility. Prior to 2020, the sensitivity of the Indian capital market movements to changes in FII was much higher (figure 4). That has come down post 2020. Regression analysis confirms that Indian capital markets are less sensitive (statistically significant) to foreign capital volatility after 2020 and both the models are good fits (see “Regression analysis”).
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