The recent fluctuations in the U.S. stock market have created a stir, with the S&P 500 plummeting by 10% and the Nasdaq 100 experiencing an even steeper decline of 14%. In stark contrast, India’s stock market has demonstrated remarkable resilience throughout this global downturn. The Nifty 50 index bounced back from a recent low of 21,964.6, confidently surpassing the 23,000 mark and closing at 23,350, reflecting a 6% increase month-over-month.

Factors Driving India’s Market Resilience

One of the main catalysts for India’s stock market recovery is the notable decline of the DXY, or the dollar index, which indicates a weakening U.S. economy. The DXY has fallen from a peak of 110 to below 104, largely due to economic consolidation efforts in the U.S. The Federal Reserve’s recent decision to lower the GDP growth forecast for CY25 from 2.1% to 1.7% while also raising inflation and unemployment projections has added to this narrative.

• Impact of the Federal Reserve’s Policies:
  • The Fed is slowing down its quantitative tightening (QT), which previously restricted market liquidity.
  • Recent reductions in open market operations related to bond purchases have led to a decrease in demand for the dollar.
  • This has allowed non-dollar currencies, including the Indian rupee, to appreciate, providing a boost to emerging markets.

In the past three months, global indices such as the S&P Euro and Hang Seng have surged by 12% and 20%, respectively, showcasing a broader recovery trend in markets outside the U.S.

U.S. Economic Challenges Ahead

Looking at the U.S. economy, President Trump’s tariff policies are expected to pose challenges in both the short and medium term. The administration appears prepared to endure temporary setbacks for potential long-term gains, but the ongoing trade disputes with key partners like China and the European Union raise concerns about economic stability, with fears of a recession by CY26.

• Specific Tariffs and Their Effects:
  • A 25% tariff on steel and aluminum is driving up domestic metal prices.
  • The tariff on imports from China has increased to 20%, likely raising inflation further.

These disruptions to traditional business operations could lead to significant economic losses in the U.S., potentially pushing the stock market into a correction phase. Additionally, plans to cut fiscal spending to manage the deficit may hinder growth, creating further uncertainty in the market.

Global Market Dynamics Favoring India

Despite the challenges faced by the U.S., international markets are benefiting from more supportive government policies aimed at enhancing liquidity and fiscal spending. For instance, the European Central Bank (ECB) has reduced its bank rate to 2.5%, while the Federal Reserve maintains a rate of 4.5%.

The Chinese government is also shifting its approach, relaxing restrictions on private firms to stimulate economic activity in light of a slowing economy. This proactive stance is likely to foster a more favorable environment for investments in emerging markets, including India.

Key Drivers of India’s Market Rally

Several factors are propelling the Indian stock market’s upward trajectory:

• Foreign Institutional Investors (FIIs) have reduced their selling activities as the dollar weakens.
• Domestic Institutional Investors (DIIs) continue to buy into the market, showing confidence in its potential.
• After a six-month consolidation phase, valuations have aligned more closely with long-term averages.

Encouraging economic indicators, including a strong Index of Industrial Production (IIP) and Purchasing Managers’ Index (PMI), alongside decreasing inflation and crude prices, have further bolstered market sentiment. The Reserve Bank of India (RBI) is expected to implement a second 25 basis point cut in April, with more adjustments anticipated in the future.

Looking Ahead: Earnings Growth and Market Stability

As we approach the release of Q4FY24 earnings results in April, expectations are cautiously optimistic. The previous quarter saw earnings growth at 10%, below the long-term average of 15%, but the upcoming results may reflect significant improvement due to increased government spending.

• Market Predictions:
  • If earnings align with historical growth averages, the current market rally could persist.
  • Although potential volatility may arise from the implementation of reciprocal tariffs on April 2, negotiations for a bilateral trade agreement are underway, which could mitigate these impacts.

The author, Vinod Nair, serves as the Head of Research at Geojit Financial Services, providing insights into the evolving market landscape.