Indian markets await cues from Budget 2022, Fed stance

Confusion in Indian markets
Indian markets had a record-breaking run in 2021, but the new year was marked by volatility and confusion.

The last year was path-breaking for many reasons. It introduced us to the concept of work from home and made internet connectivity central to our lives. It forced people to use digital payments like never before. Even after the ebbing of the pandemic following the deadly second wave, several workplaces continued functioning in hybrid mode with part of the workforce getting to work from home. Despite a losing streak in the beginning of the Covid-19 outbreak , the securities markets in India and world over bounced back and touched all-time highs.

The Indian markets saw an unprecedented growth in terms of retail participation — demonstrated by the number of investors in cash markets through mutual funds and the number of new demat accounts. FPI inflows and DII investments also went up substantially. The unexpected growth in retail participation in derivatives markets prompted SEBI to introduce new margin rules to calibrate positions taken in derivatives and improve delivery based trades in cash markets.

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Joyride by Indian markets

India has the largest number of listed companies in the world and contributes 3% to the global market capitalisation. India has the highest volumes in many derivative products in the world. In 2021, 63 companies got listed on Indian stock exchanges, having issued equity shares worth Rs 1,25,983.41 crore. None of the companies were undersubscribed. The oversubscription ranged from 1.95 times to 200.79 times.

The newly listed companies were from a wide range of industries such as automobiles, chemicals, computer software, construction, asset management, dairy, pharmaceuticals, diagnostics, defense, e-retail, hospitality, general insurance, steel, telecom, housing finance, small banks, tours and travel, and equipment.

It was interesting to note that 46 companies have given listing day gains ranging from 0.76% to 270.4% whereas 17 companies registered listing day losses ranging from 1.13% to 27.25%. The year saw 29 companies offering rights issues through NSE and 40 through BSE. The number of companies tapping the Indian markets with offers for sale was 164 at NSE and 30 at BSE.

The market capitalisation of India rose 36% from Rs 204 lakh crore in 2020 to Rs 278 lakh crore by the end of 2021. The average daily turnover of NSE cash segment has increased by 11% (from Rs 61, 839 crore to Rs 68, 349 crore) and for BSE the growth was 31% (Rs 4,197.15 crore to Rs 5,488.92 crore) compared with the previous year.

The Indian markets attract a greater number of investors every year. The number of demat accounts grew by 106% from 3.6 crore in 2018-19 to 7.4 crore by November 2021.The Sensex and Nifty gave 22% and 24% returns respectively in 2021 — on January 1, 2021 Sensex was at 47868 and Nifty was at 14018. Sensex ended the year with 58253 points and Nifty with 17354 points. The net FPI to equity for the year 2021 stood at Rs 25,752 crore. Overall, the year 2021 attracted net FPI inflows amounting to Rs 50,089 crore.

The SME segment also saw a good number of new entrants (56 SMEs were listed in 2021). 38 SME IPOs gave listing day gains ranging from 0.22% to 311%, while 16 companies ended the listing day with losses ranging from -0.09% to -24%.

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Derivatives market

The average daily turnover in the derivatives segment of NSE grew by 136% from 2020-21 (Rs 25.85 lakh crore) to 2021-22 (Rs 60.98 lakh crore). For BSE, the growth was 92%. The total turnover in the derivatives segment of NSE went up by 86% and the total number of contracts grew by 53% compared with the previous year. The turnover in the derivatives segment of BSE grew by 52% and the total number of contracts went up by 59%.

The currency derivatives and commodity derivatives saw good movement compared with 2020. The number of contracts of currency derivatives (both options and futures) increased by 63% and the turnover rose by 64% in 2021 (till November) compared with 2020 (for NSE, BSE and XMSE together). Similarly, the commodity derivatives market transactions also grew in 2021. The MCX ICOMDEX rose by 8% and the NCDEX NKrishi went up by 44% in November 2021 compared with January 2021.

India re-introduced interest rate futures in 2014 and options in 2019. The interest rate derivatives have seen a downtrend in terms of number of contracts and turnover in 2021 (till November) compared with 2020. The number of contracts on interest rate futures on BSE grew by 1.2%, but the turnover fell by 2.88%. The number of contracts and the turnover of interest rate futures at NSE fell 81.14% and 81.77% respectively. At the same time the number of contracts and the turnover for interest rate options came down by 26.13% and 28.57% at NSE.

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Mutual funds

The mutual fund industry registered stellar growth in 2021. The net inflow to the industry was negative in January 2021, but for rest of the year it remained positive. In December 2021, it stood at Rs 46,165.16 crore. The AUM of the industry has gone up to Rs 37.73 lakh crore by December 2021 from Rs 30.5 lakh crore in January 2021. The total number of folios reached to Rs 12.02 crore by December 2021 from which maximum retail investment was around 9.74 crore.

Though the spread of Covid-19 in the initial months of 2020 set a downward trend, concerted fiscal governmental and regulatory action instilled confidence in the markets, resulting in record gains. Corporates performed much better than expected and low interest rates helped the Indian markets attract a large number of retail investors. The country’s ended the year on a record high, though they are struggling to retain the gains in the new year.

The stock market turned volatile in the new year, taking cues from global trends. The market is likely to remain volatile as investors are watching the upcoming Union Budget 2022 and the pronouncements from the crucial Federal Reserve meeting on January 26. Speculation is rife that the regulator will effect four interest rate hikes, instead of the three announced earlier to curb inflationary pressures. A change in the trajectory of Fed will have repercussions for India and other emerging markets.

(Dr Pradiptarathi Panda is Assistant Professor at National Institute of Securities Markets (NISM). Dr Babita Panda is Assistant Professor at Pillai HOC College of Arts Science and Commerce, Rasayani, Maharashtra.)

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