Will the Indian markets also slip into the bear market territory?
The big debate in the last few weeks has been whether India has slipped into a bear market and whether there is the possibility of Indian markets actually falling into a bear market syndrome.
What is a bear market?
That remains an enduring debate in the capital markets. While there is no hard and fast definition of a bear market the closest definition is of a 20% fall in the general indices from the peaks. For this analysis, the sectoral or the focused indices are not used, but the diversified indices are actually preferred. Normally, the requirement is that the index has to fall below 20% of the peak and also be there for some time. That is what will really define a full-fledged bear market.
The US is already in a bear market
Technically, if you go by the standard definition, the US markets are already in a bear market. The normal definition is that a 20% correction from the peak is a classic definition of a bear market. By that definition, the S&P 500 has fallen by 22% while the NASDAQ has fallen by 35% from its peak levels. While the NASDAQ is more of a tech-focused index the S&P 500 is more diversified. In this case, things could get worse as the Fed continues on its hawkish trajectory. It could end up making the US markets a lot more bearish. Also, in the US, there was the problem of overvaluation and this was more pronounced in NASDAQ.
India in dollar bear market
What is meant by a dollar bear market? A typical sign of the market is when the Nifty corrects 20% or more from the peak. From that standpoint, the Nifty is just 18% below the peak level, so it is technically not in a bear market yet. However, the dollar depreciated 5.1% from the peak levels, and if you add that up, then the Nifty is actually down by more than 23% from the peak. That is why, in dollar terms, Indian markets are already in a bear zone. After all, when it comes to foreign portfolio investors, it is the effective dollar returns that matter. If you accept that definition, the Indian markets are already in bear territory.
Can Indian markets fall further?
There are no easy answers here. The truth is that the stock markets are down substantially. However, most of the short-term risks are already in the price. The only risk is that India could go into a recession, but that is a very remote possibility at this point in time since the advance tax numbers are robust and the capacity utilization has expanded from 65% to 71%. With the rupee already at 78/$, a chunk of the FPI flows is likely to come back in search of the currency arbitrage. With $28 billion of FPI money already having left India since Oct-21, the risk of further outflows is lower. The bottom line is that a deep bear market does not look likely at this point. That is the real big hope, at least, for now!©