In the aftermath of the COVID-19 pandemic’s economic disruptions, the Indian market has embarked on a remarkable recovery journey. This article delves into the nature of this resurgence, explores investor behavior, and examines the investment channels currently favored by Indian participants.

A Post-Pandemic Bull Run

The Indian market has witnessed a sustained uptrend since the second quarter of FY2022, marking a clear departure from the initial pandemic-induced downturn. This bull run, lasting for at least three years, signifies a robust recovery and renewed investor confidence.

Investor Behavior: Responding to the Uptrend

The market’s positive trajectory has influenced investor behavior. We’ve observed a surge in investor activity, with individuals actively seeking investment opportunities to capitalize on the growth potential. This shift reflects a growing risk appetite and a willingness to participate in the market’s upswing.

Market Performance:

• 2021-22: This year marked a strong rebound for the Indian stock market after the initial shock of the COVID-19 pandemic. It delivered a return of 18.30%, indicating a significant bull run.
• 2022-23: The market performance in this year was more subdued compared to the previous year. It witnessed a flat return of around 0.7%, suggesting a period of consolidation or slight correction.
• 2023-24: The market regained momentum in this year, delivering a robust return of 24.85%. This signifies a continuation of the bull run that began in 2021-22.

FY 2021-22

The year after covid, FY 2021-22 the following the gains were delivered by the market 

Broader Market Performance

It’s important to consider how the broader market performed beyond just the headline index. While you mentioned a point-to-point return, including specific details (e.g., percentage increase) would offer a more complete picture. Did all segments outperform the previous year, or were there any variations? Did smaller or mid-cap stocks outperform large-cap stocks, indicating broader market participation?

Government Stimulus and Inflation

Injections of money into the economy by governments worldwide likely played a significant role in the stock market’s initial rebound after the pandemic. However, such a stimulus can also contribute to inflation if not carefully managed.

The observation about inflation not being felt in 2020-21 but rising in 2021-22 aligns with this notion. The effects of stimulus programs often take time to manifest, and the rising US inflation by year-end 2021 (at 8.5%) suggests a potential consequence of the earlier measures.

The article above states how the US Fed reserve helped to create cash and help the country from going into recession 

(https://www.brookings.edu/articles/fed-response-to-covid19/). Which was invariably linked to high inflation in the countries. But there were many reasons why the inflation increased in the economy , As discussed the world over we are discussing a few reasons which caused the inflation 

All-in money printing totaled $13 trillion: $5.2 for COVID + $4.5 for quantitative easing + $3 for infrastructure. The money supply normally grows about 7% per year but quantitative easing (QE) of more than $4 trillion has increased money supply by 14% per year over the past decade. The $5 trillion in COVID relief increases the money supply by 27% and does so very quickly – the floodgates are open. Quantitative Easing did not bring inflation as measured by the Consumer Price Index (CPI), so that experiment has been declared a success, but the reality is that QE did inflate stock and bond prices, so there was inflation but not in the usual metric. By contrast, much of the COVID relief money will go directly into the hands of the consumer, so CPI will increase.

Supply Side bans imposed on China by the US on manufacturing of Semiconductor , led to rising commodity prices, while at the same time caused a serious disruption of the world’s supply chain.

1. There were the shipping snarls and bottleneck in global supply chain industry caused by Covid-19, worker shortages , the labor market tightened during 2021 and 2022, core inflation rose as the ratio of job vacancies to unemployment increased, 
2. The spikes in energy and food prices caused by the invasion of Ukraine Russia 

The multiple reasons stated above lead to inflation. Inflation started increasing after the first quarter of the financial year in the world. First of all it was thought to be transient in nature due to shipping bottlenecks which were created , towards the latter part of the year the other issues also caught up. 

Towards the end of this year the inflation has reached its highest levels and even the major conflict dented the sentiments which caused markets to close at level lower in the last few months.

FII Equity inflow 

But we see that during the year the FII were net sellers throughout the year, and toward the end of the year the maximum outflow happened. 

The selling pressure further intensified as the oil prices increased towards the year end as war signals intensified. So even with the high selling from FII, the DII continued buying throughout. And the market was supported by the heavy DII and retail buying. 

So the question that we need to answer in context of Indian market for the year 2021-22 

Why did FII were net sellers in the Indian Market ? 

One reason was tapering in the US market –

It was only in the November 2021 meeting that the Fed took a decision and began reducing the monthly pace of its Treasury purchases by $10 billion and its MBS purchases by $5 billion in November and December. The Fed doubled the pace of tapering at its December 2021 meeting, and Fed Chair Jerome Powell confirmed in January 2022 that the plan is to end asset purchases in early March 2022. The Fed has made clear that tapering will precede any increase in its target for short-term interest rates. So tapering not only reduces the amount of QE, it is also seen as a forewarning of tighter monetary policy to come.

In January 2022, the Fed said that it plans to “significantly” reduce its balance sheet “over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held” as opposed to selling bonds from its portfolio, but did not provide any more specifics as to the size, pace, or composition of these reductions. However, the Fed did say that in the “longer run,” it plans to hold primarily Treasury securities rather than mortgage-backed securities, because it seeks to minimize its role in allocating credit to different sectors of the economy.

At his January press conference, Powell emphasized that the balance sheet reduction would only start after the Fed began raising rates, and that the federal funds rate would remain the Fed’s primary policy tool. He described the balance sheet shrinkage as a process that would be “running in the background” alongside the Fed’s rate hikes.The market reaction to this hike was MSCI World Equity Index has declined 7% h as investors pull funds out of overheated stocks worldwide.

The reaction to this increase was the rise in the US bond prices which were trading at levels below 1. institutional investors have begun moving funds out of risky assets such as emerging market equity, bonds and cryptocurrencies and into dollar denominated assets as safe havens. Consequently, currencies of emerging economies are weakening, further accelerating fund outflows.

So towards the end of the year the bond yield had become attractive which cause the outflow from the emerging economies as the bond yields had almost doubled. It was only during the last quarter that the inflation effect was felt by the FED and they raised the interest rates. 

Another reason was the risk premium of the Indian market increased as compared to the other emerging markets and Overall Money moved out from the EM markets

India’s blue-chip Nifty 50 was one of the best performers among emerging markets in Asia in 2021, and outpaced the MSCI World Index which rose 17%. India was trading at a 20 percent-plus premium versus its average for the last five years as expectations around a lasting cyclical recovery after the pandemic took hold. 

During the year the performance of EM was below the developed market which, so the FII were more confidant to invest in their own countries from the year starting.

The year started with lockdown with the second wave which made the India unfavourable

Soaring crude oil prices

If we look at the oil prices the Crude prices were stable below $75/barrel but it kept on rising which was another reason where we have seen crude above $75 FII becomes a seller in the India market. 

The prices increased to the extent of going beyond the  $100/ barrel which caused a large outflow from the India Economy. 

Why did the DII / Retail investors were net positive during the year?

Increased retail participation:

A surge in new Demat accounts indicated a rise in retail investor interest in the stock market.The data from Economic Survey 2022 shows that share of individual investors in total NSE turnover increases to 44.7%. This is spurred by robust growth in UPI and tech-savviness of investors.

Incidentally, the number of active retail investors in the cash segment (equities market) of NSE was around 3 million in January 2020, just before the lockdowns began. It surged to a peak of 11.7 million in January 2022.

This is the reason primary markets are buzzing and many IPOs are getting oversubscribed. The year 2021 has been a period of remarkable growth for the Indian primary market with 63 companies collectively raising Rs 1.2 lakh crore through initial public offerings which is the highest amount ever raised in a single calendar year.

SIPs are a popular mode of investment among retail investors. Data from AMFI shows that the amount invested in mutual funds surged to $4.38 billion through SIPs in the last quarter of 2021. This was 40% higher than the previous year.

Accommodative monetary policy:

The Reserve Bank of India (RBI) maintained low interest rates to boost economic growth, making stocks a more attractive investment option.

The influx of the average Joe and Jane as retail investors during the lockdown has been amply corroborated by the fact that the share of retail participation on the National Stock Exchange (NSE)—the country’s largest bourse in terms of market share—jumped to 45 per cent in FY21, from the previous year’s tally of 38.8 per cent.

Budget 2021-22: Growth Focus and Relief Measures

Economists and market analysts have lauded the 2021-22 budget for its focus on economic growth. The absence of a COVID-specific tax and the removal of income tax surcharges have been met with relief.

Growth Initiatives:

The budget outlines several measures to stimulate economic activity. These include [mention specific proposals, e.g., increased infrastructure spending, tax breaks for certain sectors].

Relief Measures:

By forgoing the implementation of a COVID tax and removing income tax surcharges, the government has provided much-needed financial relief to taxpayers.

Privatisation and Asset Monetisation:

The proposed privatisation of two nationalised banks and the monetisation of assets like land are seen as positive steps towards increased efficiency and unlocking new sources of revenue. The potential impact of these measures on the financial sector and the broader economy remains to be seen.

Conclusion : 

Overall, the Indian stock market has witnessed a robust recovery and investor confidence since the second quarter of FY 2022. This is evident from the sustained uptrend that the market has experienced over the last three years.Even though the FII who had been driver of the Indian markets, were net seller cause of the Global environment high risk premium in India, Rising oil prices , bond yields and global conflict.Indian Investor were still positive on the equity investment.  Investor behavior has also reflected this positive trend. There has been a surge in investor activity, with individuals actively seeking investment opportunities to capitalize on the growth potential. This shift reflects a growing risk appetite and a willingness to participate in the market’s upswing.