Synopsis
In this month's edition, CIO P Krishnan examines the quiet but persistent weakening of the market's traditional shock absorbers, and why the build-up of asymmetric risks in Indian equities deserves serious attention.
Stretched valuations with no margin of safety While the Nifty trades close to its five-year mean, mid and small cap indices are at 33–36x trailing earnings — a significant premium with earnings downgrades looking all but certain. Domestic fund flows have distorted price discovery, masking the underlying risk.
The fuel price gamble India has seen the shallowest petrol price pass-through among major economies. The government's incrementalist approach is being read by markets as an unhedged bet on a favourable resolution of the oil crisis — a political choice that carries meaningful financial consequences.
The FII exodus FPI ownership has been on a sustained decline since FY21. This is not hot money leaving — it reflects the institutional memory of foreign investors who have seen this playbook before in Japan (1989), Taiwan (late 1980s), and across other emerging markets.
A wealth transfer hiding in plain sight Since 2021, FIIs have net sold ₹12.9 lakh crore in Indian equities, while DIIs have net bought ₹22.5 lakh crore. Retail Indian investors, channelling savings through mutual funds, are effectively funding the exit of foreign investors — at their own expense.
RBI's diminished firepower The central bank has already deployed significant policy measures ahead of this crisis. Currency volatility has further narrowed its ability to counter what is becoming a hydra-headed supply shock.
No traditional safe havens FMCG is expensive. IT faces structural challenges. Financials are reasonably valued but vulnerable to positioning risk if asset quality shows any stress.
The newsletter concludes with a sober warning: India has enough resilience to avoid a full-blown crisis, but a deterioration short of a crisis can still be damaging enough to make a meaningful mean reversion in valuations a distinct possibility.