Exploring the Top Emerging Market Economy

India’s stock exchange made headlines yesterday crossing the US$ 4 trillion mark. Stocks have been marching higher for the past few weeks but, when you zoom out, India’s financial markets have actually been growing for a while.

A look at the country’s economic landscape tells us that it’s more than just the stock market that’s growing. The development and transformation over the past few years have been rapid and structural. We’re still bullish on India going into 2024 and expect the growth momentum to continue, albeit at a marginally slower pace. But even a slower pace for India is a solid growth rate compared to most other Emerging Markets.

Today was the last meeting of 2023 for the Reserve Bank of India (RBI) and they continued with their hawkish hold at 6.5%. With most emerging markets starting down the easing path, the question remains as to why the RBI continues with its hawkish stance here. We think they do because of several factors but, that doesn’t necessarily mean the bullish view on India goes away.

We’ve been bullish on India on a secular basis but, on a more tactical basis, we expressed a bullish view in mid-November through our weekly dashboard.

Reserve Bank of India (RBI) policy

While most emerging markets were early in their hiking cycle because they are used to contending with inflation, India wasn’t actually early. The first rate hike was in May 2022 after the US started their hiking cycle. It makes sense that they would want to start hiking as well to keep the interest rate differential at a substantial level.

If bond yields in the US, which is a higher-rated country, are higher than that of an emerging market country such as India, investors will flock to US bonds. Money flows to the US markets and investors sell the Indian Rupee (INR) to buy US Dollars (USD), causing the INR to depreciate.

Since May 2022, RBI hiked to 6.5% and has held rates there since February 2023 and we foresee this hawkish hold continuing until Q3, 2024. All things considered, this still isn’t a very high level but, the tightening cycle has been relatively aggressive.

As we said in the beginning several factors are giving rise to this view and our bullish view on equities, despite the lack of easing.

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