Rising Inflation Concerns Weigh on Indian Stock Market: "Limited Upside Potential for Now"

Price Burden and Inflationary Pressure Negatively Impact Stock Market
'Decoupling from China' Movement Strengthens Cooperation with the US...Mid- to Long-Term Attractiveness Increases

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] There are opinions that the investment attractiveness of the Indian stock market, which is under inflationary pressure due to rising energy prices, is not high. However, it is predicted to benefit in the mid to long term through strengthened economic cooperation with the United States.

On the 11th, KB Securities maintained a short-term underweight view on the Indian stock market. Although economic and diplomatic ties between the US and India have strengthened, leading to strong exports to the US, and economic improvement and market-friendly monetary policies are favorable for the stock market, the rebound is limited due to price burdens significantly exceeding past levels compared to other emerging markets.

Changmin Lee, a researcher at KB Securities, explained, “Since earnings improvements continue, the possibility of a sharp decline is low, but further expansion of valuation multiples is a burden at this time,” adding, “We need to monitor the intensity of future liquidity withdrawal policies.”

It is also necessary to consider the ongoing rise in energy prices, which negatively affects fiscal soundness. There is a high risk of rising domestic fuel supply prices in India, which had been stable until last month. Indian state-owned oil companies, being government enterprises, have restrained price increases despite rising international oil prices to prioritize price stability over profitability, but this month, rising demand is putting pressure on price hikes. Researcher Changmin Lee stated, “Inflationary pressure below the upper limit of the target range may increase in the future, and the government will face pressure to reduce fuel taxes, a major revenue source.”

From the government’s perspective, two choices are estimated to be possible: absorbing the risk of inflationary pressure by raising fuel sales prices, or seeking market price stability through fuel tax cuts at the expense of a significant portion of fiscal revenue. Currently, the Reserve Bank of India is considering the option of enduring the reduction in fiscal revenue.

In this situation, the central bank is reviewing liquidity withdrawal. The continued recovery of economic activity and inflationary pressure below expectations are expected to mitigate the side effects of liquidity withdrawal by the central bank. However, the liquidity reduction policy is predicted to be implemented cautiously because inflationary pressures may arise at any time in the future. Recently, coal supply for thermal power generation in India has failed to meet demand, increasing the risk of power shortages. If heavy rains during the monsoon season disrupt coal production and the supply shortage is not resolved, expensive coal imports will be necessary, potentially causing inflation.

Another concern is that consumer recovery is not as fast as expected. Although the decrease in new COVID-19 cases and rapid vaccination are normalizing regional economic activities, sentiment indices that gauge private consumption and investment remain below pre-COVID-19 levels.

In the mid to long term, strengthened economic cooperation with the United States is expected to positively impact the stock market. Researcher Changmin Lee analyzed, “Amid the US’s strengthened containment of China, the Biden administration plans to actively build a new supply chain for decoupling from China by strengthening relations with India,” adding, “Fiscal improvement due to economic recovery and market-friendly monetary policies will be favorable for the stock market.”