Loosening tie between Nifty and economy

In the recent days, most of the common investors are puzzled to see frontline equity indices inching up as in the last one month; it has gained 20 per cent from their recent lows. What is baffling them is the fact that this is coming back on continuously falling economic conditions. All the monthly economic data is recording their worst numbers but still the equity market is going up. So, let us know the reason behind this anomaly.

There are various factors that explain this conundrum. First of all, historically, we have seen that there is no one-to-one-relation between Nifty earnings growth and Indian economic growth. There is only one-directional correlation, which means, Nifty earnings grow with the growth of Indian economy but their growth percentage does not match. The reason for such a mismatch is the revenue derived by Nifty companies. During 2000s, Nifty companies derived more than 80 per cent of their revenue domestically, however, it has fallen below two-third now.  This means that many companies in Nifty generate revenue outside India, which may not be captured in our economic growth.

Moreover, the share of Nifty stocks in the economy is of mere two per cent. Profits of the Nifty companies are around two per cent of the nominal GDP. Therefore, there are other reasons resulting in Nifty companies doing better despite a dismal performance by the economy.

Hence, we should not expect economic growth and Nifty to move in the same proportion.