Morgan Stanley tells why Indian markets have remained resilient despite global uncertainty

Morgan Stanley

The Indian market has shown a fair degree of resilience after reacting to the Russian invasion of Ukraine in the starting days of March 2022. The major benchmark indices have managed to hold crucial levels amidst global uncertainties. Morgan Stanley, the renowned global investment and financial services firm, attempts to explain the key reasons behind this.

The Indian stock market reacted very sharply and fell vehemently after Russia announced the invasion of Poland. Nifty breached its major support and lost a significant chunk on the first day of the invasion. However, the market regained at the same pace the very next day and gave a good enough closing

Since then, it has continued to be resilient even though the Russia-Ukraine crisis is yet to get resolved and the hiking of the interest rate for the first time in the last four years by the US Federal Reserve, not to miss the rising crude oil prices!

Summary in Brief

Morgan Stanley said “Indian equities have mostly disregarded the supply shock in oil prices revealing some fundamental shifts in market structure and dynamics”. 

It also compiled a list of six key factors that supported the Indian market to remain resilient despite global uncertainties-

  • Election results in India and government’s policies

The brokerage firm believes that the government’s policies favouring the economy’s growth and lifting profit shares in GDP, creating new job opportunities have received a positive response from the recent elections. The firm said, “The electorate seems to be favouring incumbents consistent with improving growth and the diffusion index of election victories for the NDA inflected in an upward direction”

  • Support from domestic investors

Morgan Stanley says that India may be entering into a new profit growth cycle after 15 years of break or stagnation. This is giving impetus to domestic investors to pump money into the market. Commenting on the FPI selling, the brokerage firm said that FPI selling can be an amalgamation of several factors like rebalancing of portfolio, overweight of the Indian market, and the fact that there has to be someone selling in the market, which in this case are largely FPIs.

  • Increased foreign investment in the country

Thanks to the direct incentives from the government, the positive sentiment in MNCs to consider India as their next investment arena is at all-time-high. This is translating into a steady rise in FDI, which in turn, will lead to new corporate capex and thus, will supplement growth further, the firm believes.

  • Shift in the funding of India’s current account deficit 

There has been an increase in FDI relative to FPI, which reveals that the fund of India’s current account deficit is going through a major shift. Morgan Stanley believes that the country’s current account is now less sensitive to the fluctuations in the global capital market. 

  • Flexibility in policy making

The brokerage firm said that the government is sitting on a more-than-normal fiscal deficit and is in no hurry to clamp upon it to reduce it. Furthermore, the apex bank RBI is able to move forward with negative real rates even though the US Federal Reserve has given up its easy monetary policy. 

  • Manageable impact of higher oil prices

Morgan Stanley said that the effect of the higher proportion of longer-term foreign inflows changing the nature of the country’s current account has made the spike in oil prices relatively easier to deal with.

The firm took a note saying, “FPIs tend to be more sensitive to fluctuations in oil prices, but in the past, their withdrawal of money from the equity markets when India needs it the most caused non-linear effects of supply shocks in oil”.