Indian stock market decoupling has begun. 3 reasons why it will last

economictimes.indiatimes.com:

MSCI India moving up 13%, when MSCI World index was up only 4% and MSCI EM down 1%. India is the second-best performing market since April 2023, coming behind the Japanese Nikkei which is up 15%, tipping NASDAQ which is up 12%. (Source: Bloomberg) India’s economic and earnings growth strength, coupled with a possible recession in the US are the two key reasons behind India’s outperformance and we are hopeful that this outperformance should continue due to 3 reasons.

1. The US 2-year and 10-year rates are close to peak backwardation with the 2-year being at 4.9% and the 10-year at 4.0%. This difference has widened from 50 bps a month ago to ~90-100 bps.

The raising of the debt ceiling has not softened it either. We are also expecting the FED to hike interest rates by 25 bps hike in the July 25-26 FOMC meeting. The US has tightened the liquidity (QT) by almost US$ 500 billion YTD to US$ 21.1 trillion and its debt at almost US$ 32 trillion is at an all-time high.

This means a higher possibility of a recession and the US being forced to slow down the economy further by raising rates. As against this, India is in normal contango at 7.07% and 7.16%, respectively, with a positive yield of 10 bps. The positive yield of India as against the negative yield in the US suggests a possible recession in the US as against steady-state economic growth in India especially in its domestic front.

(Source: Bloomberg) 2. The rupee-dollar movement has been a dampener to investors, depreciating by 4-5% every year for the last two decades. The forex reserves of the country have moved close to peak levels of $595 bn and with crude and coal prices having softened, we may see even higher reserves of as much as $650 bn in the next 12 months.