Why Markets At All Time High Despite Lower GDP

Table of Contents

WHY IN NEWS?

Equity benchmark Sensex has been hitting fresh record highs on a daily basis even as high-frequency macroeconomic data continued to show acute pain in the economy.

Coal output crashes by over 20%.
Overall, eight core sectors lose a stunning 5.2% year-on-year over September 2018, contracting to an 8-year low. GDP hits a 6-year low.
And yet, India’s stock markets hit an all-time high!

The first budget after election in 2019 was an unusual tax-and-spend document.
Among several excesses,it brought foreign investors under a “super rich tax” of nearly 43%.
The foreign investors panicked & the markets tumbled nearly 10%.

On one hand government was under the impression that everything is good in the economy.
But on the other hand, corporates were expecting some big bang reforms like- tax cut, disinvestment etc.
But to their surprise, the budget in June was just opposite of what they expected.
This was a big setback for the corporate world.
It led to panicking situation in the market,
FPIs started selling and the market saw one of the biggest selloff in such a short period.

Since then government has done many roll backs.
It has overturned many of the decisions it took in the general budget presented in June.

The benefit of the corporate tax cut was directly to the companies having turnover of more than 400 crore.
This led to huge jump in Sensex.

Ever since that u-turn, the government has been accelerating in the reverse direction.
It is talking about hitherto unthinkable actions such as:-
Decision to sell BPCL to a private acquirer for close to $10 billion.
Rolling back long-term capital gains taxes.
Making Air India more sellable by permitting 100% equity sale.
The government is widely expected to tweak to income-tax rates, GST, long-term capital gains (LTCG) and DDT, etc.
The corporate tax rate has already started reflecting in the second quarter earnings of India Inc.
On the monetary policy front, RBI has cut the policy rate by 135 basis points since February this year.
In spite of a weak state of the economy, the market is now focused on other reforms that the people believe are likely to be announced in the next six months or so.
Thus the prime market driver is the EXPECTATION of more government measures to speed up economic recovery.