Indian stock markets have rallied strongly since the worst days of the coronavirus outbreak, becoming the fifth biggest contributor to global market capitalization with a share of 3.1%. The mint examines what it means and what signals it sends about the Indian economy.
What is market capitalization?
This is the total market value of a company’s outstanding shares, and is calculated by multiplying its total number of outstanding shares by its current market value. Market cap refers to the value of a firm as determined by the stock market, and helps the investor determine the returns and risks involved in investing in the shares of a particular company. On the basis of their market capitalization, firms are divided into large-cap (firms with market cap) 20,000 crore or more), mid-cap (market cap) 5,000-20,000 crore) and small-cap firms. Those with a large market cap are considered safe investments.
What has been the trend of the market cap?
After an initial rally from the Covid-19 pandemic, Indian stocks recovered sharply. According to the Economic Survey 2020-21, for the first time since October 2010, India’s market cap to GDP ratio crossed 100% in 2020-21. The country’s share in the total value of global equities has rebounded sharply, and currently stands at 3.1%. global market. As per the MSCI Index which measures the performance of the large and mid-cap segments and covers around 85% of Indian equities, the country has outperformed the global markets, be it the MSCI World Index or the MSCI EM Index.
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Where is India’s rank among countries in the big leagues?
India ranks fifth in terms of share in the world market capitalization. The US topped the list with a market cap of $44.73 trillion, followed by China ($10.43 trillion), Japan ($5.5 trillion) and Hong Kong ($5.4 trillion). India entered the top five clubs in March 2022 and has a current market capitalization of $3.2 trillion. Despite the better performance, India still has a long way to go.
What are the major drivers behind this?
Despite frequent withdrawals by foreign portfolio investors due to various factors such as high interest rates in the US and deteriorating geopolitical environment, domestic investors have been instrumental in propelling the Indian market. Retail investors have relied heavily on stocks, which has brought stability to the Indian equity markets. However, it is not clear whether domestic institutional investors entered the market with the support of equity research or to keep market sentiment high.
What do market sentiments mean?
The capital market is considered a broad barometer of the economy and an indicator of what may happen next. Market booms are generally considered to represent a booming economy, while crashes can initiate recessions. While equities across the world have witnessed heavy volatility, India remains largely resilient. However, it is important to note that market sentiment managed without logic from any equity research can only end up as a bubble.
Jagdish Shettigar and Pooja Mishra are faculty members at BIMTECH