Why is the Indian Stock Market Lagging Behind Other Asian Markets?

The Indian stock market experienced increased volatility at the beginning of December, primarily due to a rise in selling by Foreign Institutional Investors (FIIs) compared to November. Several factors have contributed to this cautious stance by FIIs, including the postponement of the US-India deal, a widening trade deficit, and concerns surrounding President Putin's visit.

In the second week of December, profit-booking by FIIs intensified across Asian markets. This was largely triggered by rising Japanese bond yields and a general inclination to secure profits after the strong performances seen in 2023 by markets like China, Japan, South Korea, and Taiwan.

The Japanese 10-year bond yield increased significantly, from 1.70% to 1.95% within a month. This increase raises the risk of a reversal in the yen carry trade due to the appreciation of the yen. The Bank of Japan (BOJ) is anticipated to raise interest rates as persistent inflation remains above the 2% target. Furthermore, the new Prime Minister Takaichi's stimulus plan is expected to necessitate increased debt issuance, potentially exacerbating the country's already high debt-to-GDP ratio, which stands at approximately 260%. This economic environment could prompt profit-booking in emerging markets through the unwinding of yen-based exposure.

Several Asian markets have delivered substantial dollar returns year-to-date: the Nikkei (27.5%), Hang Seng (29.5%), KOSPI (73.7%), and Shanghai Composite (16.0%).

**Indian Market Underperformance**

In contrast, the Indian stock market has significantly underperformed its Asian counterparts, with a dollar term return of approximately 10%. This figure is further affected by the 5.7% depreciation of the Indian Rupee (INR). As FII sentiment potentially turns more cautious toward Asian assets, it could have a cascading effect, impacting markets like India as part of a broader trend.