After a volatile start to June, India’s benchmark index, Nifty 50, rebounded onto its growth trajectory, surpassing the 24,000 mark by the end of the month as Narendra Modi was re-elected for his third term as Prime Minister. The benchmark index's rise has accelerated in the past month, climbing 7.8% to reach new all-time highs.

In this Chart of the Week, we take a look at the performance of India’s benchmark Nifty 50 over the past year (July ‘23- July ‘24) and the factors influencing the momentum. As of July 3, the Nifty 50 has risen 26.6% over the past year despite challenges such as high interest rates aimed at tackling inflation and international conflicts like the Russia-Ukraine war and the Israel-Hamas conflict.

For FY24, India’s GDP growth was reported at 8.2%. During a press conference, RBI Governor Shaktikanta Das said, "We are confident about 7.2% growth in FY25, and assuming a normal monsoon, we expect food inflation to go down and project CPI inflation for FY25 at 4.5%" He highlighted that despite inflation gradually approaching target levels worldwide, the final steps in beating back inflation were proving to be difficult.

The election shock that made the elephant index dance

Modi’s Bharatiya Janata Party (BJP) won three out of four state elections in December last year. Many predicted that this "hat-trick" in state elections would lead to “a hat-trick in 2024," and that Prime Minister Narendra Modi's third term was inevitable. People seemed to buy into the narrative of a "double engine" government with the same party in the states and centre. As a result, on December 4, the Nifty 50 rallied by 419 points, posting a gain of 2.1%.

On April 19, the seven-phase voting for the Lok Sabha elections began in India and concluded on June 1. Despite analysts' optimism about Modi’s third term, India's volatility index jumped by more than 50% during this period, reflecting the uncertainty surrounding the election results as conflicting ground reports started to trickle in. 

As polling ended, media houses started releasing exit poll data indicating a clear majority for the BJP. In anticipation, the Nifty 50 soared 733 points, gaining 3.3% on June 3.

However, as the vote counting began on June 4, the exit poll forecasts turned out to be wildly off, and the market shed all its gains from the previous day and more. The ruling BJP was leading in fewer seats than expected and was not securing a single-party majority. Consequently, the Nifty 50 experienced its worst day since the pandemic, falling 5.9% on June 4.

Ultimately, the BJP won 240 out of a total of 543 seats and formed a government with the support of its NDA alliance. The markets rallied after the BJP-led NDA alliance formed a government with Narendra Modi re-elected as Prime Minister for a third term. There were no changes in significant ministries such as Finance, Highways, Defence, and Home. Following this, the India VIX returned to normal levels, and the Nifty 50 posted a new all-time high, crossing the 24,200 mark.

India’s growth story leads the index higher and higher

The G20 summit, held in India last year, featured the 20 largest economies. During the summit, PM Modi announced the launch of the India-Middle East-Europe mega economic corridor. This announcement helped the Nifty 50 index breach the 20,000 mark on September 11. Following this news, Adani Ports & SEZ, a marine ports and services company, soared by 7%.

India’s GDP growth has also bolstered investor confidence, driving the index up at an accelerated pace. Fueled by double-digit growth in the manufacturing sector, strong performance in the construction sector, and high domestic demand, the GDP growth rate for Q3 came in at 8.4%. Following the announcement of these GDP growth numbers, the index rallied 356 points, posting a gain of 1.6% on March 1.

Weak performance by IT firms and Banks led to an index correction

Indian Information Technology (IT) firms posted weak performance in Q1FY24 as institutions worldwide cut down on tech spending in this high interest-rate environment. Additionally, weakening demand and recession fears in the United States exerted pressure on their earnings.

During the Q1FY24 results announcement, Infosys CEO Salil Parekh said, “In the short term, we see some clients stopping or slowing down transformation programs and discretionary work, especially in financial services, mortgages, asset management,etc.” The weak outlook for FY24 led to industry-wide selling which led the index down post Q1FY24 results.

On January 17, HDFC Bank plunged over 8% leading the index down by 460 points as it posted mixed performance in its Q3FY24 results that failed to impress investors. Although credit growth gained momentum, the bank struggled to attract deposits at the same pace, which could lead to higher costs of funds and lower margins.

Geopolitical tensions triggered an industry-wide sell-off in October last year

The ongoing wars between Israel-Hamas and Russia-Ukraine spooked investors worldwide. In October last year, markets experienced significant selling pressure amid growing concerns about the escalation of the Israel-Hamas conflict. However, this effect faded as strong Q2 earnings led the index back to its growth trajectory.

Meanwhile, the Russia-Ukraine war has extended into its third year. Ukraine continues to receive support from NATO, an alliance of countries in Europe and North America. After months of delay, the US Congress passed a Ukraine Aid package worth $95 billion in April this year.