The Indian economy has come a long way since the 1991 economic reforms, it has been the fastest-growing major economy in the world for a large part of the previous decade. The growth trajectory was derailed because of the pandemic but now slowly the economy is gaining its ground and displaying signs of recovery. India is viewed as a global investment destination and the well developed Indian financial markets are a testament to this fact. India is home to two out of ten largest stock exchanges in the world by market capitalization, and witnessing higher participation of retail investors in the market at an unprecedented rate. But with growth, there are also challenges that the Indian economy and markets face. What are the issues plaguing the Indian economy and markets and more were discussed at the session on Economy & Markets at The Indian Economic Forum & LitFest organised by The Skoch Group on the 16th of March 2022. The esteemed panel discussed these issues in detail and gave recommendations to steer the way forward
Indian Economy and Markets: Key Issues
The recent geopolitical events have sparked a conversation on what will be the medium and short term ramifications of the Russia-Ukraine crisis on the Indian economy and where do we stand as of now. There is no doubt about the fact that crude oil imports are the biggest constituent of the Indian import basket and cause a significant outflow from the forex reserves. In light of the recent skyrocketing of crude oil prices, the task of managing retail fuel prices will prove to be tough for policymakers as high fuel prices will have a cascading effect on inflation as well. Rising inflation is one of the most crucial challenges that the policymakers and RBI have to deal with and the recent global developments have only made their task tougher.
Another important issue is the performance of the Indian stock markets in the last two years. Both Nifty and Sensex have touched all-time highs in the last two years. This leads us to ask if there is a disconnect between the actual state of the economy and the performance of the markets. What can be the factors behind the stock market rallies and how does this impact the average retail investor? There are multiple factors that can be attributed to this. The equity markets have been flush with liquidity since the interest rates were lowered in the aftermath of the pandemic. This increased liquidity has found its way into the equity market and resulted in a rally. Another factor is the low-interest rates on bank deposits in India, currently returns from bank deposits are fetching negative returns if adjusted for inflation. This has also pushed retail investors in the direction of equity markets to get returns that beat inflation. However, the fact remains that with the FIIs and FPIs pulling out of the market due to recent geopolitical tensions and US Fed rate hikes, market sentiments will be muted in the near future and investors need to adjust their expectations towards realistic returns.
However, without any external shocks, the Indian economy should continue to grow at decent growth rates in the medium term and dedicated policy interventions in the areas of finance, domestic markets and trade can further accelerate our growth. India is a young economy with an aspirational investor base and only holistic and inclusive growth can put India in a growth trajectory that can distribute gains spatially. Keeping in light the multiple challenges faced by Indian domestic and financial markets, the esteemed panel made the following recommendations:
India has a massive opportunity in terms of retail participation in markets, there is a need to ensure that the participation of younger investors in the market is sustained and there is enough awareness to protect retail investors from market shocks
India is a country with an evolving financial market, there is a need for the regulators to strike a balance between regulation and market development
There are newer age companies coming out with IPOs that retail investors are not able to understand. There has to be an intervention from SEBI on when companies can list and control how IPOs are advertised
The Indian economy was sustained in a large measure during the COVID induced slowdown by the agricultural sector. There is a need to unify the agricultural markets of India by introducing a central law that allows unrestricted movement of agricultural goods from one state to another
There has to be increased funding in agricultural research and development to build capacity for agricultural exports
There has to be an increased focus on boosting exports in order to leverage our economic growth in the best possible way
India’s retail participation in equity markets is much lower than advanced economies such as The US and China, there is a need to direct more resources to solve this problem and broaden the net of investors and advisers to increase retail investors participation in the markets
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