The equity markets have staged a smart rebound during the months of March and April, soaring over 10 percent from lows. However, the wins have been higher for foreign institutional investors, who made 14 percent in the past two months in dollar-denominated returns.
ICICI Securities noted that the the trailing two-month returns in USD terms stood at a resounding 14 percent, as of May 2, which is amongst the best performance in the post-Covid-19 era. The brokerage noted that the 14 percent return comprises of a three percent appreciation of the Rupee, which is a complete volte-face from the preceding period.
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During September 2024 to February 2025, the drop in India’s equity market returns was exacerbated, in USD terms, by INR’s depreciation. "This was fuelled by the combined effects of the euphoria around President Trump’s victory, resulting in the USD index’ massive rally, and amplified by the concerns on the macro front due to GDP downgrades, brief spike in crude oil prices, higher inflation, tight banking liquidity conditions, relative valuations, etc.," said the brokerage.
However, at the current juncture, most of the aforementioned concerns have largely reversed. India's growth outlook also remains among the best globally on a relative basis, given the uncertainty unleashed by US tariffs.
On the flip side, this strong recovery in the markets and sharp outperformance, especially driven by the reversal in FPI outflows and DII buying, has left little room for higher gains. Valuations have also firmed up to 20.4x on the forward earnings-basis, even though geopolitical risks are elevated.
"However, the equally sharp drop in bond yields to ~6.3 percent has reduced the spread between bond yield and earnings yield to arguably its lowest level in the postCovid-19 period; thereby, providing support to relative valuations for equities," added the brokerage.
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