Reasons for rise and fall in Nifty

What exactly drives the crests and troughs of the markets; or market indices like Nifty and Sensex to be precise? The stock market has been a multi-dimensional representation; in the sense that it has reflected multiple factors rather than just one or two factors. To that extent, the indices like the Nifty and the Sensex are the best mirror of the sentiments underlying the stock market. Check the chart below.

As it can be seen from the above chart the markets have been volatile during the year 2019 but the undertone was still positive because the Nifty ended the year with gains of 13% excluding the effect of dividends. Year 2019 can be divided into 4 phases with each phase being driven by specific factors.

Phase 1 – Stable government hopes

This phase began around February 2019 when the pre-election polls by most agencies appeared to point towards a decisive majority for the ruling NDA government. This resulted in relief for institutional investors as they were worried about the possibility of a fractured mandate with an unstable coalition at the centre. The fear was that this could lead to derailing of the reforms process due to the diverse philosophies. Foreign portfolio investors had sold record $14 billion of equity and debt in 2018 but turned net buyers post Feb-19.

Phase 2 – NDA does better than expectations

It was not just the NDA reaching the majority mark but the BJP on its own got absolute majority. The Nifty crossed 12,000 for the first time in its history on the day of the election results announcement. The return of a majority government was seen by markets as a veritable boost for the reforms process. The assumption was that reforms that were work-in-progress would be driven to its logical conclusion in the second term. This included some far-reaching reforms like GST, IBC etc, which had faced implementation hassles in the first term. This optimism led to a surge of FPI inflows taking the markets higher.

Phase 3 – Post budget disappointment

The budget was supposed to be a big bang budget but ended up disappointing the stock markets. The proposal to increase the public shareholding from 25% to 35% led to fears of too much paper in the market. The buyback tax at 20% of the difference in value was seen as unfair. In addition, the uncertainty over previously announced buybacks was a stumbling block. But the biggest disappointment was the steep increase in taxation on the higher income groups. This also extended to trusts and AOPs and that would have resulted in higher tax burden on nearly 40% of the registered FPIs in India; triggering a major sell-off.

Phase 4 – Corporate tax cuts and after

The decisive rally began on 20^th September when the finance minister announced a drastic cut in corporate tax rates from 30% to 22%. Exemptions and rebates were done away with but that hardly made a difference to a vast majority of Indian companies. The Sensex rallied 2100 points on that very day and has not looked back since. The indices closed the year very near to their peak levels and that trend has sustained through January 2020 also.

What is really significant about the Post-September rally is that it occurred in the midst of negative macros. GDP growth fell to 5% in Jun-19 quarter and further to 4.5% in Sep-19 quarter. In addition, high frequency indicators like IIP and core sector were negative while inflation spurted to 7.35%. In the midst of this macro chaos, the Nifty and Sensex scaled new highs. That was the best summary of stock markets in 2019.