Does Sensex’s New High Mean Revival Of Growth In The Economy?

Markets are one of the many indicators of an economy's health. Stock market indices rally when investments in companies increase on account of improved confidence.

In the midst of slowing economic growth in our country, Sensex hit a new all-time high of 40,816 on Wednesday, while Nifty 50 was over 12,000 points.

Slowing economy

For the first quarter of 2019-20, India's GDP (gross domestic product) growth was reported at 5 percent, the weakest pace in six years and also the sixth consecutive quarter of slowdown in growth. The results for the second quarter are now awaited.

Scheduled to be released on 29 November, most economists and rating providers expect the GDP to grow at a slower pace for the September-ended quarter.

Recently, an SBI Research report lowered India's GDP growth estimate for the second quarter of 2019-20 to 4.2 percent on low automobile sales, deceleration in air traffic movements, flattening of core sector growth and declining investment in construction and infrastructure. It also cut the country's GDP growth estimate for the whole year to 5 percent from 6.1 percent earlier.

Why can Sensex not be the ideal indicator for economic growth?

Sensex and Nifty 50, the two benchmark indices of the Indian stock market indices, though often used to give a general idea of the market's condition, only provide a limited picture of its state. The two indices indicate the combined movement of 30 and 50 stocks, respectively.

BSE's broader index, BSE-500 closed at 15,461, which is far from its last seen record high over a year ago in March 2018 at 15,887.

In the one year period, while Sensex and Nifty 50, both gatherers of performance of large profitable companies, have climbed 15 percent and 12.82 percent, respectively. On the other hand, BSE mid-cap and small-cap indexes have fallen 0.07 percent and 6.7 percent, respectively. This goes to show that the rally in the large-cap indexes are a result of a narrow band of stocks growing, while the others may still be struggling to attract investments.

Grow is likely on its way

Analysts believe that stock markets are futuristic in nature. The current surge seen on account of the steady increase in risk appetite and inflows could mean that growth is picking up.

Last year, investor sentiments were hurt on account of the NBFC (non-banking finance companies) crisis, while a fall was in economic growth became more and more clear in 2019.

Steps taken by policymakers in India and around the world have also been encouraging for growth.

With major central banks, including RBI, making interest rate cuts for growth and improved trade relationships between countries, markets around the globe are trading at new highs.

Last week, major American stock indexes, including S&P 500, Dow Jones Industrial Average and Nasdaq Composite touched all-time highs.

Earnings in the current quarter are also hoped to improve, largely on account of the corporate tax cuts.

However, the recovery in the economy's growth is unlikely to be quick or sudden considering the structural changes. Only time will tell.