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India's journey to becoming the world's fifth-largest stock market.
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The Big Story
A former colony is ready to conquer its coloniser
…in terms of stock market capitalisation.
According to Goldman Sachs, India could become the world's fifth-largest stock market by 2024, crossing the $5 trillion mark and exceeding the stock market capitalisation of Britain and the Middle East. This year alone, India's stock market capitalisation has advanced 37% to $3.46 trillion, compared to the UK, which increased by almost 9% to $3.59 trillion.
And as India's startup ecosystem continues on its upward trend with almost new IPOs launching every month, the investment bank further estimates that the nation would add $400 billion of market capitalisation in the next 2-3 years. This growth is attributed to the 150 private firms expected to go public in the next 36 months.
While several factors are responsible for this newfound growth, the two that contributed the most are the retail-investing boom and RBI's record-low interest rates.
The Digital Boom
India's digital economy is now bigger than ever, with over 800 million internet users and more than half a billion smartphone users. And as the coronavirus pandemic pushed many sectors like education, groceries, and shopping online, startups operating in these sectors reported significant growth.
In 2020, more than 10.4 million people invested in over 1,500 companies listed on the NSE. What's more, this increase is propelled by the notable rise in global liquidity, with FII inflows reaching $36.18 billion in FY21.
Combining this growth with a favourable regulatory environment has led to the creation of over 30 unicorn startups in 2021. And the number is only expected to rise as the growing digital payments ecosystem, larger smartphone user base, and digital-first business models continue to attract new investors.
Record Low Interest Rates
Another reason for this stock market uptick was RBI's decision to keep interest rates at an all-time low of 4% despite inflation threatening to break its set target range of 2-6%.
The RBI said that these rates are instrumental in boosting credit and investments by businesses as India continues on its nascent economic recovery following the pandemic. And as retail investors keep wagering for further gains, the central bank remains committed to high spending.
What's next?
Call it a pandemic-induced decision or an investors’ personal choice to grow their net worth, India’s investment frenzy shows no signs of slowing down as the adoption of the internet and online access encourages more investor participation from Tier 2 and Tier 3 cities.
“In terms of retail investor participation, China is probably a model of what you can expect will happen in India,” emerging-market investor Mark Mobius told Bloomberg. “India could easily equal China’s market cap in the next 5 to 10 years because going forward, growth in India’s market will probably be faster. China, because of its size, will probably grow more slowly.”
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