New Delhi: The winning streak for Indian equities is losing momentum as sentiment deteriorates on the prospect of tighter monetary policy and smaller stimulus spending in the coming year.
The Indian benchmark S&P BSE Sensex is down 3.6% since late September, halting a rally that lasted six quarters in a row and doubled the index’s value. Since hitting a record high in October, the meter is approaching a technical correction, with foreign investors taking more than $4 billion out of the market in the past three months.
Historically high valuations have also made some analysts cautious. India’s major stock indices are trading at 20-21 times their estimated 12-month future earnings, compared to 12 times for the MSCI Emerging Markets Index.
“Reducing monetary policy support and reducing fiscal support over the coming year could negatively impact global growth and equity valuations,” wrote Credit Suisse Group AG analyst Jitendra Gohil and Premal Kamdar, analysts at Credit Suisse Group AG. this week in a note.
According to the Indian equity unit of Standard Chartered Plc, the withdrawal of monetary stimulus could cause a jump in volatility reminiscent of 2003 and 2009, when prices fluctuated while stock returns remained modest.
The Indian stock market is likely “to move from ‘early cycle’ to ‘mid cycle’ as monetary policy normalizes and central banks become less accommodative,” the research note said.