Until the pandemic, India’s stock market was like another world that Dilip Kumar never had a reason to visit. But like so many other people around the world who were stuck at home, he began to see it as the place to be. Kumar, a proposal administrator at an engineering company in New Delhi, set up a free stock trading account through Zerodha, India’s largest online brokerage firm, and plowed some of his savings into Indian Railways as well as a clothing retailer and a cinema chain. “I invested in all the things I was using daily,” he said. Since then, he’s gotten “a big return in quick time” — more than doubling his money in a little over a year. Plenty of others want in on the action.

India’s booming stock market is drawing both local novices and global investors to shares of the financial, industrial and technology companies that dominate its listings. The MSCI India index is up about 30 percent this year — nearly twice the return of the global index — while India’s benchmark 30-share S&P BSE Sensex is up roughly 25 percent. Both have notched a seemingly relentless string of record highs, soaring on factors including simple demographics, governmental and fiscal policy and geopolitical changes. The enthusiasm is clear from the initial public offering this week for the parent company of the digital payments platform Paytm. The company hit its target of raising $2.5 billion — making the offering the biggest in the country’s history and valuing the company at more than $20 billion. The offering underscored the momentum of the financial and tech sectors in a country with a predominantly young population embracing digital start-ups.

At the same time, the government of Prime Minister Narendra Modi is trying to make India more self-reliant, a boon to domestic businesses offering everyday goods and services, while trying to bring more citizens — and their money — into the formal economy. And this spring, the Indian central bank embarked on a bond-buying program that’s a smaller version of the sort that has lifted stocks around the world. Combine those factors and it’s a recipe for a retail investor boom: According to the Securities and Exchange Board of India, new securities-holding accounts have risen to an all-time high. “There is pent-up demand among the upper middle class, who have been rushing to the market,” said Jiban Mukhopadhyay, a corporate economics professor emeritus at the S.P. Jain Institute of Management and Research.

Their confidence has been buoyed by the huge stakes that institutional investors overseas are taking in companies that have gone public this year. Abu Dhabi’s sovereign wealth fund, the Texas teachers’ pension fund and the University of Cambridge have invested a total of more than $1 billion in Paytm. One reason: Foreign investors have lately soured on China, long the destination for those seeking high-flying returns, as growth there slows and a powerful central government cracks down on big tech companies. “India really stands out this year, with China decelerating,” said Todd McClone, a portfolio manager at William Blair’s Emerging Markets Growth Fund. His fund sharply cut its allocation to China, moving much of that money into Indian stocks including the conglomerate Reliance Industries, the paint manufacturer Asian Paints and the specialty chemical company SRF.

“With accelerating growth, lots of good companies and all the demographics that stand behind it, I think it gave people a lot of confidence to come back to that market,” he said. It remains to be seen how sustainable the rally will be. Emerging markets like India can often be at the mercy of decisions made by investors on the other side of the globe. Oil prices are surging, which is a particular challenge for India, a major importer.

Economists also point to an uneven recovery from the pandemic that has pushed many Indians back into poverty. The economy plunged 21 percent during India’s first lockdown, the small and mid-size businesses that employ most of India’s work force continue to falter, and the government is spending billions of dollars to mop up banks’ growing number of bad loans. But investors remain optimistic: Wall Street analysts expect Indian companies to increase their earnings more than 22 percent over the next 12 months — calculated in dollars — a faster pace of growth than benchmark indexes in either China or the US.

“Stock prices follow earnings, and Indian corporates have the strongest fundamental momentum,” said Brian Freiwald, an emerging-market portfolio manager at Putnam Investments in Boston. Part of the reason for the Indian market’s rapid ascent can be traced to 2016 and a policy of demonetisation. Meant to tamp down money laundering, the policy banned the most widely circulated currency notes and wiped out the savings of families and small businesses overnight. But it also bolstered companies like Paytm, a sector that benefited further as the pandemic disrupted face-to-face transactions.

Adding to the momentum are market-friendly measures delivered by Indian policymakers. In February, Modi’s government proposed a budget that called for more spending on health care and infrastructure. Then, two months later, the Reserve Bank of India began the same kind of quantitative easing programs that the Federal Reserve and other central banks instituted to support their domestic economies. Though it started its bond-buying program more than a year after the Fed’s began, India enjoyed a similar stock-market response: Shares took off. For global investors, it was a stark contrast to what was happening in China, which had already enjoyed a rapid recovery from its pandemic shutdowns. Chinese policymakers began withdrawing some of their support for the economy early this year. Growth began to slow — it was down to just 4.9 percent in the third quarter — putting pressure on debt-laden firms that rely on continuously fast growth to pay their creditors. At the same time, the Chinese government, under the increasingly centralised power of President Xi Jinping, has begun to rein in some of the country’s most prominent tech companies.

It has been an unappealing backdrop for investors, and Chinese markets have posted some of the worst returns in the world this year. “India tends to do well when there’s an issue in China,” said Divya Mathur, an emerging-market portfolio manager at the money management firm Martin Currie in Edinburgh. As rapid as the Indian market’s gains have been, they remain fragile, experts said. Emerging markets like India can whipsaw as global investors who poured in money can pull it out quickly, particularly when central banks raise interest rates and attract investor capital. India was slammed by such a situation in 2013: When the Federal Reserve began to step back from low-interest rate policies after the 2008 financial crisis, investors pulled their money from India. Its currency, the rupee, plunged to a new low against the dollar and pushed the country to the brink of a financial crisis. Mukhopadhyay, the economics professor, said those dynamics are a sign that market returns aren’t an indicator of broader prosperity. “The Indian stock market behaves like a pampered kid,” he said. “It has hardly any relationship with the movement of the economy.”

The writers are journalists with NYT©2021

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