India’s blue chip Sensex stock market ended up +4.4% at 60,840 for the year, it was the only major Asian stock market to finish green in 2022. The Indian market hit in all-time high in December. On the last day of the trading year the Sensex was down -0.5% and +1.7% for the week. This was the seventh consecutive year of gains but the smallest since 2018. Growth in the Indian economy overcame high inflation and interest rate hikes by the RBI as it benefited from the weak Indian rupiah. India also benefitted from China’s problems domestically and their relationship with the West and the rest of Asia.
The sharp correction in crude oil was a big positive with India being a major importer. India is one of the world’s biggest energy importers makes it vulnerable to global price shocks and therefore currency volatility. A 5% fall in the rupee pushes up inflation by about 20 basis points, according to a study by the Reserve Bank of India.
India’s economy grew by 6.8% in 2022. The robustness to the volatile economic momentum in Asia drove investors to become net buyers of Indian equities in November and December setting new record highs, setting a positive precedent for the start of 2023.
MSCI Emerging Market Index
Another factor is index weighting and overseas buying is helping the Indian markets. India has almost doubled its weight in the MSCI Emerging Market Index to 16 percent in the last two years to become the second-largest market in the index, according to the data available at the end of October 2022. Foreign institutional investors (FIIs) were net buyers in the capital markets on Thursday as they purchased shares worth Rs 1,231.98 crore, according to exchange data. Last month with the Rupee’s decline Investors had continued pulling out of domestic equities during the period, taking the total outflows to almost $29 billion in 2022.
China has seen its weightage fall below 27 percent for the first time since Q1CY17 as the Shanghai Composite and Hang Seng indices are down 15 percent and 25 percent, respectively by November.
The Indian rupee declined to a lifetime low in October weakening beyond 80 a dollar to 83.28 amid rising interest rates in the US and risk-off sentiment. The hawkish stance from Fed pushed the dollar to two-decade highs. Additionally, soaring crude oil prices, weakening in the Chinese yuan and foreign funds outflow impacted.
Exporters haven’t benefited from the weak currency as other currencies are also falling in tandem. Indian rupee is expected to remain under pressure in 2023. The rupee is currently around 81.6 against the US currency. The local currency weakened significantly by over 10% against the greenback in the current year due to macroeconomic uncertainties and is down 11.08% year on year versus the US dollar, falling around 2% in December.
Companies with foreign currency debt are also vulnerable to rupee depreciation. About $79 billion worth of foreign debt, which makes for 44% of the total overseas borrowings by Indian firms, are unhedged, according to RBI. Both cost of repaying and rolling them over has increased after rupee’s sharp slide against the dollar.
Corporate earnings for sectors that rely heavily on imported raw materials such as automobiles, steel and electronics will bear the brunt of a falling currency. Higher costs will eat into margins and impact profitability for companies.
Morgan Stanley on Indian Stocks
Global investment bank Morgan Stanley in November said it is ‘underweight’ on India in its market allocation framework from a tactical and valuation perspective, but it sees compelling long-term opportunities in certain pockets which keeps it binding to the market.
“The diversification trend is propelled by both global narratives (eg structurally higher commodity price, multipolar world investing) and idiosyncratic stories in EM (eg the implications of social and economic infrastructure laid the foundation for the New India, the reform agenda in the Middle East and China’s shifting growth model under the Regulatory Reset and Common Prosperity),” Morgan Stanley said.
Morgan Stanley downgraded India’s healthcare sector to ‘underweight’ due to unattractive valuations, upgrading India Industrials and India Utilities to ‘equal-weight’ on an ongoing capex boom to drive growth.
MS remains ‘overweight’ on India Financials saying, “the progress made on the foundational ID and emphasis on infrastructure likely will lead to a credit boom, benefiting the financial sector while higher household income also helps the sector through improved insurance pricing and greater penetration.”
There are many factors at play in the Indian stock market given the currency dynamics and outside influences. 2023 will be a year to watch how these trends continue.
How Global Indices Fared in 2022
Asia Pacific Region Equity Markets in 2022
- Japan’s Nikkei: (-0.5% for the week/-9.4% for the year)
- Hong Kong’s Hang Seng: (+1.0% for the week/-14.4% for the year)
- China’s Shanghai Composite: (+1.4% for the week/-15.1% for the year)
- India’s Sensex: (+1.7% for the week/+4.4% for the year)
- South Korea’s Kospi: (-3.3% for the week/-24.9% for the year)
- Australia’s S&P/ASX 200: (-0.9% for the week/-5.45% for the year)
From The TradersCommunity News Desk