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Stock Markets Break Free

Rajeev Dubey     June 24, 2020

It's up. It's down. It's up, but down. Down, but up. Huh! If you've been trying to make sense of the stock markets, then you aren't alone. Millions get exasperated deciphering every move of the markets. Especially today. Whether it's the unflinching faith in the power of the Indian economy and corporates or just irrational exuberance, despite the fall the markets are trading at double the valuation of the Lehman crisis in 2008. The December, 2019 peak was, in fact, higher than the Lehman peak.

But bare facts would tell you, the sharp recovery after a precipitous 39.4 per cent cent fall since January and a sustained run in the stock markets is built on pretty weak fundamentals. Corporate earnings are on a slippery wicket, and will continue to be on the edge for at least a year. Lockdown has dealt a punishing blow to firms and individuals whose delinquencies will unfold over the next few quarters; it will worsen the already high NPAs in the banking sector. Indian economy is projected to shrink up to a half in Q1FY21 and possibly 6-7 per cent in the entire fiscal, India's macroeconomic fundamentals have never been more shaky. The spat with China on the border and its economic consequences have added yet another unknown. Foreign portfolio investors are on the run withdrawing as much as Rs 20,375 crore since the beginning of the year. And market valuations, it seems, have broken free of fundamentals. The rally in the markets since the fall has been driven by a narrow band of barely 10 stocks, which account for over 75 per cent of the entire gain in marketcap. Dive deep into the fundamentals in our cover story this issue.

Meanwhile, the debt-spurred revival of the Indian economy following the Lehman crisis has come home to roost. India's 20 most leveraged firms have a combined debt of Rs 15.4 lakh crore - which is half of the nation's budgeted expenditure for FY21. The top five companies - Reliance Industries, Vodafone Idea, Bharti Airtel, Larsen & Toubro and Tata Steel - alone accounted for more than half of that amount. But with both top line and bottom line likely to be hurt due to the lockdown and its fallout, servicing such huge debt is getting tougher for the best of the lot. It's a scramble to reduce the debt burden in corporate India, though not everybody is succeeding. Read Nevin John's account of how the most debt-laden firms are faring. An accompanying piece by Marti G. Subrahmanyam, the Charles E. Merrill Professor of Finance, Economics and International Business at the Stern School of Business in New York University, explains how external capital raised by India Inc. is beginning to extract a higher cost from the firms.

If corporate debt is in the spotlight, so is burgeoning national debt which threatens to weaken India's credit profile. In the past decade, India's debt has remained range-bound in the 66-68 per cent range. But with the Centre committed to raise more resources to fight coronavirus and to provide a stimulus to the economy, rating agencies say India's debt to GDP ratio will likely jump to as high as 84 per cent in FY21, the highest in nearly two decades. Global rating agencies Moody's and S&P have forecast 83.7 per cent and 82.7 per cent, respectively, for FY22. That would be nudging India's record of 84.24 per cent in 2003. Anand Adhikari explains the consequences.

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