India’s Nifty Index Rebounds and Should Continue to Climb Higher

In the wake of the COVID-19 pandemic, India’s stock market, the nifty fifty, experienced a wild ride. The Indian stock market plunged in March along with most of the world’s equity markets, as COVID-19 forced countries around the globe to quarantine and “shutter in place”.

On March 24, Narendra Modi announced a lockdown and warned that the quarantine could be extended further. Approximately 20% of the world’s population were told that they needed to stay at home except for essential businesses. The initial quarantine was set for 21-days. Unfortunately, this was later extended.

As restrictions in India have been relaxed the spread of COVID-19 has accelerated. Reports in the first week of June show that fatalities in India have passed 6,000. The country also saw its largest spike in new cases reported with nearly 10,000 confirmed cases in one day in the first week of June. The total number of infections stands above 216,000. Unfortunately, the number of cases is accelerating and shows no signs of slowing.

As COVID continues to spread, concern over India’s finances has reemerged. That has led to a downgrade in the countries credit rating which will make it harder for the country to borrow at depressed interest rates. Moody’s downgraded India’s credit rating to Baa3 and maintained a negative outlook. Moody’s also said that a prolonged quarantine to erode the fiscal strength of the country. There was some good news in that Donald Trump wants to change the G7 and allow India to come to meetings that impact the world. The G7 meeting planned at Camp David was postponed after German Chancellor Merkel declined President Trump’s invitation.

The Nifty index bounced in March and has rallied 34% since hitting a low in March. The stimulus around the globe has helped the index rebound, but there are likely hard times ahead for India. The stock market is generally forward-looking at the rebound reflects the opening of the Indian economy, as well as, a move into riskier assets. Current interest rates in India for savers are low, and rates in the US and Europe are at zero and negative respectively. This makes riskier assets much more attractive which is part of the reason the India index has rebounded. If you put money in an Indian savings rate, the 2-3% you would receive is less than the devaluation of the currency that has occurred in 2020, which is close to 6%. To keep up, investors will need to put money into the stock market. While the outlook for the economy remains uncertain, and earnings also are suspect, investors will have to choose between safety and returns.

The technical picture of the Nifty 50 is positive. Prices have cleared the April highs which are now seen as support near 9,877. Additional support is seen near the 9,545. The trend is positive as the 10-day moving average recently crossed above the 50-day moving average. Momentum has turned positive as the MACD (moving average convergence divergence) index recently generated a crossover buy signal. The MACD histogram has also generated a crossover buy signal, slicing through the zero index level. The trajectory is positive and rising which points to accelerating positive momentum.

The Bottom Line

The upshot is that while the economy recovering in India will likely to slow and bumpy, the stock market should continue to trend higher, as liquidity floods the capital markets. The technical outlook is also positive, which points to positive returns for the Nifty index in the second half of 2020.