The price of Brent crude has crossed $77/barrel, up nearly 12% since 23 March. Simultaneously, the rupee has depreciated by nearly 4%. Since India is a net importer of crude oil, these are enormous macro-economic headwinds. Not surprisingly, this is reflected in a rebound in bond yields to 7.728%.

But stock market investors have responded to this with a yawn. NSE’s CNX 500 index has risen 7% from its 23 March lows, and is down less than 5% compared to its peak in January.

“Higher oil prices are tantamount to higher tax on Indian citizens, with a US$1/bbl increase costing the economy US$1.5 bn. Also, higher bond yields are yet to reflect in valuations through higher cost of equity," analysts at Kotak Institutional Equities had said in a 24 April note to clients. Since then, the so-called crude tax has continued to balloon, but equity markets have stayed rock solid.

And it’s not like crude is the only worry. Some equity strategists are worried that populist spending ahead of the 2019 general elections and farm loan waivers by some states will result in slippages on the fiscal deficit front.

Globally, though fears of a full-fledged trade war have ebbed for now, US President Donald Trump’s decision of pulling out from the Iran nuclear accord could increase geopolitical tensions. Also, rising borrowing costs in the US and appreciation of the US dollar do not bode well for emerging market assets.

But the Indian stock market has a defence against all of these concerns: a high and sustained flow of domestic savings into equity markets. In April, equity oriented mutual funds received net inflows of Rs11,171 crore. This may be lower than the roughly Rs16,000 crore worth flows in some earlier months, but it is nothing to sniff at.

It certainly is making the markets smug. NSE’s Volatility Index (India VIX) or the fear gauge, is currently at 14, much lower than the levels seen in February this year. At that time, the markets were a bit worried about the imposition of long term capital gains tax. But note that crude prices have risen by $10/barrel and volatility expectations have actually fallen.

Another negative the markets have taken in their stride is the selling by foreign institutional investors.

“A weakening rupee could hurt foreign portfolio inflows into Indian equity market and that is a worry, especially since global liquidity is squeezing. So far, strong inflow of funds by retail investors via mutual funds could have been a key factor supporting the market sentiment. However, one needs to closely watch if this trend of strong inflows sustains," Dhananjay Sinha, head of research at domestic brokerage Emkay Global Financial Services said.

With local interest rates on an upswing, investors could consider allocating fresh funds into fixed income alternatives, market analysts cautioned. However, unless the stock market sees a sharp correction, they do not expect significant redemption by domestic investors. It’s a classic chicken-and-egg situation—will domestic investors reduce flows because of concerns about the confluence of macro headwinds, thereby leading to a correction in the markets, or will the markets correct regardless, leading to outflows by domestic investors and an exacerbation of the fall?

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