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Updated February 5th, 2024 at 08:30 IST

India's stock market attracts billions amid China's struggles, risk considerations

Goldman Sachs predicts the Nifty index to reach 23,500 by the end of 2024, while ICICI Securities anticipates a nearly 14 per cent increase.

Business Desk
Sensex
Nifty | Image:Republic
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Indian stock market analysis: India's burgeoning $4 trillion stock market is becoming a magnet for both domestic and foreign investments, drawing attention as an attractive alternative to the tumultuous Chinese markets.

Despite concerns about overpriced shares, impending elections, and regulatory uncertainties, investors are pouring billions into India's market, buoyed by optimism surrounding Prime Minister Narendra Modi's anticipated return for a third term.

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In the past 10 months, the benchmark NSE Nifty 50 Index has surged by a third, with foreign inflows reaching $20 billion in 2023, according to data from national depository. 

India's appeal is further bolstered by expectations of Modi's continued leadership and promises of fiscal responsibility, including plans to reduce fiscal deficit and borrowing in the upcoming financial year.

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Even as the market trades at lofty valuations, analysts remain bullish on India's growth prospects. 

Goldman Sachs predicts the Nifty index to reach 23,500 by the end of 2024, while ICICI Securities anticipates a nearly 14 per cent increase. 

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Despite being one of the world's most expensive markets, with a forward price-to-earnings ratio of 22.8 for the Nifty 50, investors are optimistic about earnings growth, projected at a compounded annual rate of 16.3 per cent.

However, some experts warn of underestimating the risks inherent in India's market. 

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Remi Olu-Pitan, head of multi-asset growth and income at Schroders, cautions that investors might not be fully pricing in the vulnerabilities and risks, despite the country's promising growth trajectory.

Short-term volatility, particularly around the upcoming elections, remains a concern for investors, with implied stock volatility on the rise. 

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Furthermore, as China's market begins to stabilise and attract foreign interest, India may face increased competition for investment funds.

Regulators are also keeping a close watch on the market's rapid expansion. 

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The Securities and Exchange Board of India (SEBI) has issued directives to stress test mid and small-cap funds and tighten scrutiny of offshore funds with concentrated holdings in local stocks. 

With domestic ownership dominating at 35.6 per cent, SEBI aims to mitigate potential risks associated with excessive inflows.

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As the May elections approach, political uncertainty looms large on investors' radar. While Modi's popularity suggests a favourable outcome for his party, any unexpected electoral results could dampen market sentiment and influence economic policies.

Overall, while India's stock market continues to attract significant investment, analysts urge caution amid evolving economic and political dynamics, stressing the need for a balanced approach to navigate potential risks and opportunities.

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(With Reuters Inputs)

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Published February 5th, 2024 at 07:39 IST

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