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India’s institutions and the ability to withstand the next big market crash

India's economy and markets have shown remarkable resilience, reaching new highs despite concerns about potential market froth. Strong economic fundamentals, robust corporate earnings, and a more robust regulatory environment have contributed to this outperformance, which has outpaced other major economies over the past decades. While valuations may be stretched, India's long-term growth prospects remain bright, with its institutions and economic foundations well-equipped to navigate any market volatility.



India's economic and financial landscape is shining brighter than ever, defying global uncertainties and cementing its position as one of the world's most promising growth stories. Despite concerns from regulators and industry leaders about potential market froth, the underpinnings of India's remarkable performance remain solid.

 

The Indian equity markets have reached new record highs, fueled by the country's strong economic fundamentals and the robust performance of companies across diverse sectors. "From the capital markets regulator to the Chief Justice of India – almost everyone in a position of responsibility appears to be worried about the froth in the stock markets," notes one industry observer. However, this exuberance reflects the abiding faith in India's long-term growth trajectory.


Indeed, India is poised to be the strongest growth engine among major economies, with corporate earnings climbing across industries ranging from industrials to real estate. "While both are true, the question as always is how much one pays for an asset? Are the expectations realistic?" says a market expert.

 

Naysayers may point to past market crashes, such as the post-1992 meltdown, the 2000 tech bubble burst, and the post-Lehman collapse. However, India has emerged from these challenges with its institutional and economic foundations strengthened. "Three decades of economic reforms and the refinement of institutions have placed the Indian market on a better footing than in the past," explains a financial analyst.


The resilience of the Indian market is evident in its remarkable performance over the past decades. India's top equity benchmark has returned an impressive 11.6% annually over 20 years and 11.8% in the past decade, second only to the United States. These high returns are more than double the gains seen in China and the broader MSCI Emerging Markets Index.

 

While the market has faced scandals and instances of malfeasance in the past, the current regulatory environment appears to be more robust. "Institutions – be it the stock exchanges, clearing corporations, margins at broker level – appear to be sound with regulatory monitoring, though there could be many individual level blow ups," notes a market observer.

 

The banking regulator has also taken proactive steps to tame any potential excesses, tightening lending norms and capping loans to initial public offerings. Furthermore, the Financial Stability Report highlights the resilience of the clearing corporations, a crucial market infrastructure.

 

The strong fundamentals of Indian companies are another testament to the country's economic resilience. The largest 6,000 companies have grown their earnings by more than 15% in the last decade, according to Marcellus Investment Managers. Even with a potential slowdown in earnings growth, certain sectors like healthcare and automobiles are expected to continue delivering robust performance.


While skeptics may argue that current valuations are stretched, the long-term outlook for India remains bright. As former Fed Chairman Alan Greenspan once observed, "it was very difficult to definitively identify a bubble until after the fact." India's institutions and economic foundations appear well-equipped to weather any market volatility, empowering the country to write its next chapter of growth and prosperity.

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