India's NSE Nifty 50 Index up over 7% this year . India's equity market results would fall behind China and Korea next year .
Analysts and strategists agree that Indian stocks, which provided a refuge from the losses that plagued global equity investors in 2022, would lose momentum next year as sky-high valuations eat into market enthusiasm, and that the nations bonds will benefit from being included in major global indexes in the next six months, according to Hiren Dasani, managing director of Goldman Sachs Asset Management.However, India will do much better in the medium term because of the compounding opportunity of growth.Here's a look at the valuation challenges for the Indian markets in 2023.As compared to an 18% decline in global stocks, India has been a standout market this year, with the NSE Nifty 50 Index up over 7%.According to Jefferies Financial Group Inc. analysts, the blue-chip benchmark trades on just under 20 times forward earnings estimates, versus around 13 times for the MSCI Asia Pacific Index.We are cautious on India due to high valuations, and Citi says cyclical stability has been minimal.India is expected to lag any pro-cyclical rally elsewhere, but analysts note that this is a consistent result, putting it at 20,500 for the Nifty, or about 10% more, this year.The rupee is in jeopardy as inflows reach emerging markets, so the Reserve Bank of India is likely to use every opportunity to replenish its reserve pool, which could be a drag on the rupee.In a note, Goldman Sachs Group Inc. analysts, including Danny Suwanapruti, said that this has helped cushion the currency's decline to about 10% against the dollar, keeping losses in line with emerging Asian peers.We believe central banks that have a low reserve base and/or have seen a significant decline in their current accounts, including India, Malaysia, and Philippines, will use the opportunity to replenish reserves, limiting the scope for appreciation. In a note, a team including Meera Chandan said that trade balances are likely to double-squeezed next year between high energy imports and weak exports.This explains our decision to remain long-dot indices.Index HopeAfter JPMorgan and FTSE Russell held off from including India in global indexes this year, global funds sold index-eligible Indian sovereign bonds for the first time in seven months in October, according to Goldman Sachs.In the face of ever-increasing borrowings from the federal government, foreigners continue to hold less than 2% of India's sovereign debt, and DBS Bank is underweighting Indian government securities next year, according to strategists Eugene Leow and Duncan Tan.With lower liquidity weighing on demand from banks, market absorption of the vast quantity could be difficult.Issuance RecoveryRupee-denominated bond sales by Indian companies are expected to rebound next year as issuers transition from bank loans to notes that offer more savings. As borrowing costs stabilize, companies will favor bonds in Indias renewables industry next year, as the majority of central bank interest rate actions have been factored in.According to a recent note, Nomura analyst Eric Liu cited increased yield spreads, ESG considerations, and supportive policy measures as some of the reasons for creating attractive investment opportunities in the sector.Featured Video Of The DayIndia's Industrial Production Growth CAGRED 3.1% in September.