The din around the falling Sensex and depreciating Rupee has been hard to miss, and understandably, human nature makes us worry when markets falter. For many investors, even those with mutual fund investments, the recent market trends might feel like storm clouds on the horizon. But markets, much like seasons, naturally cycle through growth, correction, and recovery phases. What’s happening now isn’t the collapse of some fear; rather, it’s a moment for perspective, patience, and clarity about the underlying factors at play.
The equities landscape has seen corrections in the Sensex and Nifty, particularly since September 2024, causing unease. However, it’s worth noting that these indices have been on a nine-year bull run, delivering around 9per cent growth year-to-date, even after recent declines. Much of the decline stems from significant selling by Foreign Institutional Investors (FIIs), who have offloaded over Rs 1.19 lakh crore worth of equities through exchanges this year. Interestingly, while exiting the secondary market, FIIs have invested more than Rs 1.2 lakh crore in the primary market during 2024, including Rs 17,331 crore in December alone, making them net investors in India. This dual approach suggests the sell-off is more about short-term profit-booking and global fund reallocation than a loss of confidence in India’s long-term growth prospects.
Global factors have also fueled this sell-off. China’s aggressive stimulus measures boosted the CSI 300 index by 25per cent since the announcement, diverting significant FII flows from India. Investors, however, are closely watching to see how effectively the government can address structural economic challenges and navigate concerns of potential overvaluation in the market. Weak domestic Q2 earnings, with 44per cent of companies missing profit expectations as per an analyst report, further dampened short-term sentiment.
The year 2024 was a battleground between bulls and bears, characterised by intense volatility driven by key events such as the Indian general elections, the US presidential race, and a host of geopolitical tensions, including the Israel-Iran conflict. Yet, India’s macroeconomic fundamentals remain strong with high potential bank lending, 13-year low gross non-performing assets (GNPA) at 2.5 per cent as of September 2024, expected inflation easing, and robust private spending. This correction, while concerning, does not signal a structural problem.
Now, let’s address the Rupee, another point of concern. Over 2024, the Rupee depreciated by around three per cent, with approximately two per cent occurring in the last quarter against the US Dollar. The Dollar is strengthening because of Donald Trump’s public pronouncements favouring universal tariff hikes (more on the import of Chinese goods), mass deportation of illegal immigrants and income tax cuts.
If translated into policy, these are expected to increase the US economy’s inflation. As a result, the 10-year US Treasury yield, now above 4.5per cent, has made US assets more attractive, narrowing the India-US bond yield spread to ~230 basis points, its lowest level since 2006, and has halved in 2 years. All this makes capital outflows from emerging markets, including India. Although the Rupee is hitting lows against the US Dollar, its exchange rate has scaled an all-time high in real terms. The Real Effective Exchange Rate (REER) index of the rupee touched a record of 108 in November 2024, strengthening by 4.5per cent during this calendar year. The REER measures the rupee value not only against the dollar, but against the global currencies.
This was a broad dollar strengthening that reduced the attractiveness of the Indian currency, thus making it vulnerable to greater selling pressure and further depreciation. The rupee is not weakening as much as the dollar is strengthening against all currencies. The Rupee has appreciated against major currencies like the Euro, Pound, and Australian Dollar. The Euro fell from Rs 91.84 on December 31, 2023, to Rs 89.10 by December 30, 2024. Similarly, the Australian Dollar dropped from Rs 56.64 to Rs 53.33 and Swiss Franc dipped from Rs 98.88 to Rs 94.71 over the same period. This shows the Rupee’s resilience even against some of the world’s strongest currencies.
Despite these challenges, India’s external accounts have shown resilience. The Current Account Deficit (CAD) narrowed slightly to 1.2per cent of GDP in Q2 FY25 from 1.3 per cent in the previous year. The fiscal deficit, which had ballooned to 9.2 per cent during the pandemic, is now down to 5.6 per cent. In this context, the Rupee’s movements reflect global dynamics rather than intrinsic weaknesses in India’s economy. Emerging market currencies, including the Brazilian Real, Indonesian Rupiah, Chinese Yuan, and Russian Ruble, also depreciated against the Dollar, reflecting the Dollar’s global strength rather than specific Rupee weakness.
For investors, these fluctuations in equities and currency understandably cause concern. Yet, mutual funds remain among the most effective tools for navigating such volatility. Their diversification spreads risk across sectors and asset classes, cushioning downturn impacts. Professional fund management ensures investment decisions are data-driven and strategic, avoiding emotional reactions.
These strategies work particularly well in volatile markets like today’s. History offers reassurance too. Market corrections are not new, and those who stay invested typically see rewards over time. The Sensex has weathered several corrections, each followed by strong recoveries. Mutual funds’ long-term focus allows investors to ride out market cycles without attempting the challenging task of market timing.
What we see today is flux, not collapse. The Sensex and Nifty remain among the top-performing indices globally over the past decade, and the Rupee’s movement aligns with trends in other emerging market currencies. India’s strong economic fundamentals, structural reforms, and strategic trade agreements suggest the long-term trajectory remains upward. This correction is not a reason to exit but a reminder to stay the course.
— The writer is Professor of Finance – XLRI Xavier School of Management and a BJP Leader
