Shifting Sands: Indian Economy and the Way Forward for Indian Investors

Key fundamentals that would be the deciding factor in which way the markets will move are Softening Inflation and Revival of Growth.

investing in 2023
A robust asset allocation that is rebalanced regularly and is not swayed by market volatility is the key to generate wealth.

By Anupama Bhargava

The year gone by was a mixed bag full of uncertainties brought on by the Russia- Ukraine war, high inflation and now the re-emergence of Corona. For the Indian investor, it has been difficult to decide whether to be fearful on account of possible recession or be euphoric, given the rising Indian indices. With forever changing and undulating economic activity, as an investor one felt like being on shifting sands.

As we move into the new year, here’s a look back at what happened in 2022.

While 2021 was marked by a period of calm in the aftermath of the pandemic’s panic, the year 2022 started out with a fresh bout of market volatility. On Feb 24, Russia invaded Ukraine. Spiked oil and gold prices and  volatile stock markets were the new villains on the block.

By March, the rate of growth that January seemed to promise was becoming constrained by three major challenges: the Invasion of Ukraine, Inflation, and the Omicron variant.

As the year wore on and as Russia’s war in Ukraine showed no sign of abating, concerns about high inflation expectations started to build. Inflation in many countries was unprecedented, driven by higher fuel prices. In Europe, the war in Ukraine saw gas prices climb to an all-time high and worries mounted over dwindling Russian supplies. Rising cost of living, scarcity of energy to warm homes, expensive food and unsecured jobs; the squeeze was brutal. The Federal Reserve embarked on the first of many rate increases in more than three years as it launched its battle against soaring inflation.

Also Read: How to avoid sleepless nights due to volatile stock markets in 2023: Two tips

Back home, the RBI, visualized these changes and took placatory steps to factor in the Fed rate increases and its fall out on the Indian markets. We saw four rate hikes as against seven by the Fed in 2022. Surprisingly, the Indian market remained resilient to the many hikes and the rising inflation and continued to run its own course defying the global fears of recession. Whether it was our domestic consumption, our young demography or the stable Government Policies; something surely seemed to be working favourably for the Indian financial market.

For many of us, this was good as we continued to joyfully ride the financial market backed by the experience of our investing success in 2020-21. For the pessimists who tend to look at everything with a jaundiced eye, the fear of recession continued to haunt and they waited with bated breaths even as the Indian market continued to make newer highs.

Many felt it was a matter of time when we too would face the heat and they would not be wrong in their assumptions. Afterall, we cannot remain immune to the macro factors and what happens globally would certainly have an impact back home.

So, the question to find answers to is that, “How does it translate for us in the future?” The proof of the pudding lies in tasting it. Let us analyze it more systematically.

The Indian economy has largely been driven by domestic consumption but the global factors do affect us, especially the drain on our foreign reserve due to rising crude and our depreciating rupee; both are cause for concern. The slowdown in the west has a domino effect on the profit margins of our technology companies that provide tech services to them.  Additionally, the omnipresent fear of FII investors pulling out looms large.

Having said this, it is also true that when it comes to the Indian economy, there are many things that work favourably.

Dollar vs the Rupee: The rupee devalued against the dollar to set new records. Even as INR. 83 to a dollar seemed dismal, when compared to the fall in currency of other countries like Great Britain, Japan and Europe, the pain of fall is much lessor. Our Rupee has not only fallen less against the dollar, but has in fact strengthened against most currencies.

Inflation:   Hyper liquidity induced by governments’ bail out packages to combat after effects of Corona in 20-21 and subsequently the Russia-Ukraine war has led to a higher inflation globally. Oil being our major import, obviously we could not remain unaffected either. Since December last year, our inflation has been creeping up and reached a high of 7.8% in April. By November 22, it had cooled to 5.88%, well below the market forecast of 6.4%.  This has been largely possible due to a tight monetary policy by RBI.

Foreign Reserves:  With crude being our major import, any rise in crude prices raises concerns about forex reserves. At $561 billion, India has one of the largest holdings of reserves globally. Though it has taken a dent in the last few months, we are still covered for more than nine months of projected imports for 22-23.

Fiscal Deficit: On the back of strong growth and revenue targets as also robust collections on GST and direct Taxes, the Government is on track to meet the fiscal deficit target of 6.4% of the GDP.India remains the fastest growing economy despite global challenges like tightening monetary policy, slowing growth and threats of recession that the rest of world faces.

Record highs of the Indian Indices: Though we saw substantial volatility, both Sensex and Nifty scaled new heights in FY 22, proving that the Indian economy remains insulated from global upheavals while gifting the patient and the disciplined yet again.

The way forward in 2023

As the rising Covid cases in China put the world on tenterhooks of a possible breakout, the market sentiments are somewhat low.

Key fundamentals that would be the deciding factor in which way the markets will move are Softening Inflation and Revival of Growth.  On a positive note, the inflation in India has started to soften but it is still higher than the expected limit set by RBI, so we can expect a few more rate hikes.

As per a Morgan Stanley report, the Indian economy in 2023 is likely to continue growth momentum. Domestic demand will continue to drive the economy. Banking, FMCG and healthcare would be the growth driving sectors.

Also Read: Go for index funds, but don’t ignore active funds

On the debt side, the Government has increased the ROI on small savings for the 1st quarter of 2023 making it more attractive for investors. As the long-term yields soften, debt mutual funds like Target Maturity Funds, Credit Risk Funds and Dynamic Bond Funds would be good options that can give higher post tax returns than a usual bank FD.

The Real Estate Sector in India shows promise after a slow down of almost a decade. Growing population, rising incomes and the new hybrid culture of Work from Home present great opportunities of investment in this sector. However, prudence and patience are still the rule of the game when it comes to real estate investment.

On an ending note, as an investor, one should invest as per financial goals, horizon of investment and risk profile. A robust asset allocation that is rebalanced regularly and is not swayed by market volatility is the key to generate wealth. The macro level disruptions will always be there and cannot be controlled, but what can be managed is our own reaction to these disruptions. In our journey towards wealth creation, it is more important to have a sound strategy that is as per our unique requirements rather than the best possible investment.

It is time to be ‘Sure Footed’ in the ‘Shifting Sands’!

Cheers to an informed investor!

The author is a Certified Financial Planner and Partner at Beekay Taxation & Investment LLP.

Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 08-01-2023 at 08:46 IST
Exit mobile version