Markets Recover after Ratings Rock the Boat

Globally, the equity markets displayed increased volatility in the past week and this trend was also evident in India. The India VIX, a metric reflecting investors’ anticipation of short-term market volatility, observed an abrupt surge of over 10 per cent. This unexpected escalation can be traced back to Fitch, a prominent rating agency, which downgraded the rating of US’ government debt from its previously pristine top-tier status. This occurrence marks the second instance of such a downgrade, following the precedent set by S&P in 2011.

 I have personally witnessed the historical significance of this event. This marked the first time that the US’ credit rating had been downgraded since its initial assignment in 1917. As a result, the situation ventured into uncharted territory, lacking a reference point to gauge how the market would react and what repercussions it would have on both the equity and bond markets. This downgrade coincided with the backdrop of the European debt crisis, one of the most severe debt crises ever faced by the European Union. 

Nevertheless, after this initial knee-jerk reaction, the enduring repercussions of this event were notably limited, exerting minimal influence on both the equity and bond markets. This trend was particularly evident in the Indian equity market, which, despite grappling with negative returns in 2011, demonstrated resilience by rebounding and delivering substantial double-digit returns in 2012. A similar trajectory was observed in the US’ market. There appears to be no compelling reason to anticipate a divergent response this time around.

Taking a more forward-looking perspective, I hold a strong conviction in the continuity of India’s positive performance in the face of this situation with any potential impact likely to subside within a week’s timeframe. Several factors substantiate this outlook. Primarily, these can be attributed to the sustained growth of earnings, inherent economic resilience and the consistent inflow of investments from both domestic and foreign investors that continue to underpin the strength of the Indian equities market. The ongoing earnings’ season provides evidence that, in relative terms, the trajectory of earnings’ growth remains robust compared to that of its emerging market counterparts. 

Therefore, any potential market correction, if it does transpire, would likely occur within the broader framework of a structural bull market. The compelling returns witnessed in the Indian equity market over the past few months have garnered significant attention and have been instrumental in attracting substantial foreign portfolio investor (FPI) inflows. In fact, the FPI inflows for the current financial year of April to July 2023 have surged to an impressive USD 18 billion, establishing one of the most rapid four-month influxes ever recorded from FPIs. This influx will likely reinforce positive sentiment and confidence in the Indian equity market. 

Our cover story extensively probes the reasons behind FPIs maintaining a positive outlook on the Indian equity market and the sectors where they have increased their holdings. Alongside the economic considerations, an additional facet that will contribute to India’s advantage is the enduring strength of the rupee. Over the course of the year, the rupee has showcased its resilience by appreciating against the USD, marking a noteworthy reversal from the 11 per cent depreciation it underwent in the preceding year.

Within the pages of this edition, we are also paying tribute to the financial leaders of companies who stand as stalwart pillars contributing significantly to their organisations’ successful performances. There are other interesting stories too complemented by insightful interviews featuring CFOs from diverse companies, making it a compelling read that beckons you to journey from the very first page to the last. In fact, the responses of the CFOs to our questions reveal how the corporate financial mind works and how organisations create wealth through multi-pronged strategies. Do share your feedback with me on rajeshp@dsij.in

RAJESH V PADODE
Managing Director & Editor