Why equity markets aren’t falling sharply

By Malini Bhupta

The equity markets are not ruffled by the Ukraine crisis and the sharp spike in oil prices. Stocks have been more resilient compared with other assets at home for a variety of reasons. Given the size of India’s economy, the share of oil as a percentage of the GDP has steadily been going down. Morgan Stanley has attempted to explain this calm in the markets in its report, ‘Why are Indian Stocks Not Hurting More?’ This could simply be the calm before the storm or could be a new dynamic.

The report — authored by Morgan Stanley’s equity strategists Ridham Desai, Sheela Rathi and Nayant Parekh — says that historically India’s relative stock prices to emerging markets have reacted poorly to oil price increases due to supply outages. Higher oil prices negatively impact both the current account and inflation. However, the tight association of stock prices with commodity price hikes and India’s relative performance to EM appears to be breaking down.

Morgan Stanley’s team argues that there are several reasons behind India’s resilience. For starters, “policy environment is the strongest in the world driving India’s idiosyncratic growth story, and more importantly, driving likely creating a new profit cycle.” The second factor behind India’s resilience is the declining oil intensity in the GDP. Oil consumption relative to the GDP is at all-time lows and is steadily declining since 2014. Experts believe that India’s monetary policy looks better placed to handle inflationary impact from oil price hikes.

A big factor for the stability in stock prices also has been domestic inflows from retail investors. Even though FPIs have steadily withdrawn capital since October 2021, the markets have not gone into a tailspin. The Indian markets are no longer dependent on foreign capital flows. Nor is India heavily dependent on FPIs to fund its current account deficit. This is successfully being compensated by foreign direct investments, which hit $70 billion in 2021.