Factors Contributing to India's Economic Resilience

According to statistics, FII inflows $18,360 million into the Indian stock market in 2023, the largest among other nations. The nation's resilience against economic shocks and ability to move forward has been attributed to several reasons.

• Strong Domestic Consumption: India's consumer expenditure on necessities (even during the pandemic) helped counteract downturns in other industries. India's expanding middle class is protected from outside challenges.
• Focus on Self-reliance: Recent government initiatives have sought to increase domestic production while lowering imports. Programs like "Made in India" have led to a rise in domestic manufacturing of everything from cars to cell phones. It protected the economy against disruptions to global supply systems.
• Reforms and Infrastructure Development: The long-overdue changes in labor, agriculture, and finance have improved efficiency and reduced costs that ultimately enhanced the ease of doing business. Mega-infrastructure projects such as the construction of dedicated freight corridors and increased road and internet connectivity supported the resilience.
• Demographic Dividend:  India is well-positioned to gain from higher productivity and expenditure with a young labor force with 65% population under the age of 35.
• Resilient Financial System: Indian banks have been recapitalized and cleared of non-performing assets through the Indradhanush Scheme, which has improved their capacity to survive economic downturns. The market for corporate bonds has grown as a further source of capital for businesses.
• Sustained Foreign Investment: Global brands looking to expand outside of crowded developed markets are drawn to India's local market. FDI has remained strong even during the pandemic, sustaining industrial activity and jobs, and is reinforced by production-linked incentives.

Foreign Investment Influx

Foreign investments in India have grown significantly since 2014. Data indicates that foreign direct investment nearly doubled between 2014–15 and 2021–22, hitting an all-time high of $83.57 billion. Services like computer software and hardware, and telecommunications also attract foreign direct investment.

By offloading shares worth $16 billion in 2022, foreign institutional inflows into domestic stock markets have reached record heights. Proactive government initiatives like Atmanirbhar Bharat and Digital India, as well as FDI restrictions and trade agreements like the India-UAE CEPA, have all contributed to this inflow of capital.

Besides all these, Production-Linked Incentive programs have encouraged the establishment of electronics, pharmaceuticals, cars, and other essential industries abroad. With India's ongoing liberalization and provision of advantageous terms to international investors, foreign capital inflows appear to increase further across several economic sectors. 

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FII Impact on the Indian Stock Market

From market volatility to improving capital structures, the impact of FIIs on the Indian stocks market is profound. The most notable impact of FII inflows on the Indian Stock Market is as follows:

1. Massive inflows of foreign capital have increased liquidity in the market, pushing indexes like Sensex & Nifty to record highs.
2. FIIs appreciate India's strong economic fundamentals and growth potential. They purchase shares of top companies operating across diverse sectors like IT, finance, manufacturing etc. This high demand drives share prices upward.
3. Both FII and FDI demonstrate international investor confidence in India. This also encourages domestic participation and attracts more local retail investors to the bullish market environment, further amplifying the stock upswing.
4. Strong inflows of foreign capital have been a significant factor underpinning India's emergence as the fifth-largest stock market globally. Continued FII and FDI momentum bodes well for further market growth.
5. Foreign direct investment (FDI) also boosts the stock market. The majority of FDI comes in the form of overseas companies setting up or expanding existing operations in India. These investments raise business activity and revenues of Indian firms receiving investments.
6. As company earnings and outlooks improve due to FDI, their stock prices improve accordingly.

What is the Stock Market Boom?

A stock market boom is a period within the stock market that experiences increased commercial activity and stock prices. Did the Indian Stock Market Witness this period? 

The benchmark Sensex index hit an intraday low of 25,880 during lockdown. The Sensex recovered and ended at 46,262 in December 2020 from its pre-COVID level. Even more astonishingly, the index has kept rising, breaking through the 60,000-point barrier in 2021 for the first time. It was fueled by record amounts of foreign institutional investments, adding to India's economic prospects for growth and resilience.

Outlook and Challenges

India is expected to be one of the fastest-growing economies in 2023, with over 7% GDP growth projections. Continued reforms, rising consumption, manufacturing push, and digitalization will likely drive future expansion. However, risks remain from global slowdown impacts. A prolonged downturn in developed markets could lower exports and foreign capital inflows.

While FII flows have been robust, FDI inflows have been less than potential. Dependence on volatile hot money needs to be reduced through an investor-friendly policy. Infrastructure investments must be accelerated, as well. Bottlenecks of under-developed transport and energy infrastructure hamper growth, competitiveness, and ease of doing business.

Final Takeaways

The Indian economy is attracting the highest volume of FII activities. The resilient Indian economy is also expected to grow from 6.7% to 7% in the fiscal year ending March 31, 2024. Amit Gupta, the Fund Manager of ICICI Securities, said in an interview that the Indian economy is eyeing $8 trillion GDP by 2030, with Nifty crossing 20,000 in the next few months. Be a part of this rewarding journey by making your first trade with Almondz trade.

Disclaimer: This blog is posted solely for educational purposes. The securities mentioned are examples and not recommendations. It is based on various secondary sources from the internet and is subject to change. Kindly consult an expert before making any related decisions.