All-time high markets

Sensex and Nifty break all resistances

Lately, India’s leading equity market indices – Sensex and Nifty – have been setting new highs. Though, India’s GDP growth rate has fallen to its lowest level since 2014.

Virtually, no correction has been witnessed despite the unfolding of some terrible global events like trade wars, the US-Iran conflict, and global recession scares. On 13th Jan 2020, Nifty closed at its highest peak of 12,329 and Sensex closed at a high of 41,859.

Figure 1


In figure 1 above, after 2016 GDP growth rate has been declining but Nifty 50 has risen ever since. Amidst Indian economic slowdown, equity market participants are overvaluing Nifty and Sensex. Meanwhile, mid-cap and small-cap indices have been taking a hit

Equity indices may not mirror economic growth in short-term

Nifty and Sensex only represent a few companies and not the entire economy. It is well-known that equity market indices are generally a reflection of companies with the highest market capitalization.

Therefore, equity markets are not perfectly positively correlated with economic growth in the short-term. Recent times are a good example of this, where economic indicators show hampered productivity but still broader indices are trading at new highs. Further, this is not that only time where markets and GDP growth rates have shared an inverse relation. On 11th February 2000, Sensex hit a high of 6006 despite the economy faced a slowdown. (India Infoline News Service, 2014 )

Quantitatively, the correlation coefficient of Nifty 50 and the GDP growth rate is -0.39, whereas it is 0.17 between Nifty Small-cap and GDP growth rate.  (year-end data for indices and annual GDP growth rate, 2013-2019.)

Consequently, it is not a wild idea to try to establish some correlation between the two. In the past, major Sensex gains have been accompanied by strong GDP growth. (SK, 2019)

So, despite weak GDP numbers why Sensex and Nifty are at an all-time high?  There are 3 reasons why this is happening which are listed below.

Markets blatantly ignore economic fundamentals

It appears that currently, markets show no concern about lower GDP growth. In October 2019, 18 out of 23 industries show negative production growth. (MOSPI, 2019) In figure 2 below, Net National Income per capita growth rate and Money Supply growth rate are below post-GFC levels. All aforementioned indicators only point towards a slowdown.

Recently, the Government and RBI have resorted to expansionary fiscal and monetary policy. Markets are over-considering the effects of these policies. But the impact of these measures will take time to benefit our economy.

 It looks like the market is way ahead of itself as it is factoring a premature recovery in the economy. In simple terms, equity markets are trading on highs purely based on better future expectations.

However, the stark reality is that this over-optimism does not have a foundation and it appears that broad markets are not showing any distress about weak macroeconomic fundamentals.

Excessive Institutional investments 

Another reason for Nifty and Sensex highs is Mutual funds invest in the top 100 listed companies. To put things into perspective, retail systematic investment plans (SIP) steadily push ₹8000 crores a month into Mutual funds. (Alvares & Sultana, 2019)

In October 2017, SEBI re-categorized equity market cap criteria, which forced mutual funds to limit their exposure to large-cap holdings only. Further, this led to a correction in mid- & small-caps which encouraged even multi-cap funds to increase large-cap weights. (Krishnan, 2020)

In end-2019, aggregate Mutual Funds assets under management where about ₹11 lakh crores, out of which ₹8.5 lakh crores (77%) invested in large-caps, ₹1.9 lakh crores (17%) in mid-caps and only ₹0.6 lakh crores (7%) in small-caps. As per these weights, it is clear that MFs are overhung on large-caps. (Krishnan, 2020)

Additionally, in November 2019, inflows from Foreign Institutional Investors (FIIs) were at an 8-month high. In the entire 2019, net investment of $12.49 Billion poured in our markets(Alvares & Sultana, 2019) A reason for this is that international interest rates are very low or even negative in some countries. Hence, some of this money is bound to enter riskier assets in emerging economies.

Confirmation Bias on Large Cap

It is not surprising that the optimism among participants is constrained to a few large-caps. In figure 1 above, it is well-defined that Nifty has been on the rise, whereas small-caps have faced a decline.

Typically, retail investors think about market volatility in isolation, which leads to confirmation bias towards large-cap. Thinking that if equity markets turn south, then large-caps would be a safer bet. However, this ends up in an overvaluation of big stocks.

To Conclude   

The divergence between equity markets and economic growth could prove to be devastating for all concerned parties if it persists. The longer it takes, the bigger the bite. And this big bite would lead to deep corrections which could chew-out direct retail equity investor.

From a macro viewpoint, SEBI should encourage Mutual Fund & other pooled investment vehicles that invest in mid-& small-cap. SEBI should allow MFs to offer products that go against the tide

On the ground-level, investing style diversity could prove to be the key to good returns. A contrarian investing strategy is an example, where you go against the trend. Being a bull among bears and a bear among bulls.

In the absence of positive macroeconomic indicators, equity markets would not hold gains.


MOSPI. (2019, December). Press Release. Retrieved from Ministry of Statistics and Programme Implementation:

Alvares, C., & Sultana, N. (2019, November 28). Why markets are rising in times of slowdown. Retrieved from Live Mint:

Krishnan, A. (2020, January 10). Behind the bipolar market behavior. Retrieved from The Hindu Business Line:

SK, L. (2019, March 13). Does stock market mirror the economy? Retrieved from The Hindu Business Line :

India Infoline News Service . (2014 , September 3). Sensex journey… from 1,000 to 27,000. Retrieved from India Infoline:

2 thoughts on “The Indian Equity Markets ignore economic fundamentals

  1. Hello! This post couldn’t be written any better! Reading through this post reminds
    me of my old room mate! He always kept chatting about this.
    I will forward this article to him. Pretty sure he will
    have a good read. Many thanks for sharing!

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