I expect SIPs to disappoint investors: Shankar Sharma

As inflation rises, equity markets stagnate and the rupee weakens, households face growing pressure on their finances. In a conversation with Mint, market veteran Shankar Sharma, founder of GQuant Investech, offers a sharply contrarian perspective on the RBI’s defence of the rupee and the outlook for equity markets. His views on SIPs and household savings also challenge conventional investment wisdom.

Here is his candid take.

Is India heading into a prolonged period of high inflation, and could higher input costs translate into another round of price increases for consumers?

This inflation reading was expected, even inevitable, for two reasons: the persistent weakness of the Indian rupee over the past two years and the near-doubling of energy prices since the West Asia war began in March. India somehow managed to keep inflation low before the war. But with oil prices rising 70-80%, keeping inflation contained has become virtually impossible.

Importantly, the rupee was already extremely weak relative to almost every other emerging-market currency before the war. That is being overlooked because of recency bias. We are blaming the war for the currency’s weakness, even though the weakness predates it.

Higher wholesale inflation will eventually feed through to consumer prices. In the previous quarter, companies absorbed the increase in input costs. That produced an anomaly of higher cost push inflation leading to a higher manufacturing GVA (gross value added), which optically boosted the latest GDP print.

A weaker rupee is coupled with elevated global oil prices. How much of the currency’s decline could show up in the prices households pay?

I recently wrote an article examining India’s progress since the 1991 reforms, using global percentile rankings across several indicators to see how our position had changed over 35 years. One of the most interesting findings, though not the most surprising, concerned external resilience. India’s global percentile rank was 42 in 1991. Today, it is at 45. A gain of just three percentile points in 35 years tells us something important: whatever progress we have made elsewhere, our external resilience still resembles that of a classic emerging market.

We remain vulnerable to imported inflation and heavily dependent on oil prices. Our foreign-exchange reserves are largely rented rather than earned, and, as I argued in an earlier Mint article, their quality is extremely low. The classic emerging-market pattern is a falling currency, rising inflation and interest rates, and eroding reserves. Unfortunately, 35 years after liberalisation, India still displays that profile.

Is the RBI doing too much to defend the rupee?

We have broadly three markets: equity, foreign exchange and bonds. The RBI can, to a large degree, control only one of them, the local bond market, because it is the least globalized of the three. Equity and FX markets cannot be controlled by anyone beyond a point.

The RBI should not even attempt to fight the USD-INR exchange rate. I believe it is futile; it is like spitting against the wind. We have very high-cost, low-quality reserves, and we should preserve them for more pressing needs, such as funding imports.

We are trying to manage the unholy trinity of capital flows, foreign exchange and yields, which is nearly impossible for an emerging market. That is why I have argued several times that the government should sacrifice the equity market to save the currency and, by extension, the bond market.

The government can do this by reducing taxes on foreign investors to zero and raising taxes on domestic mutual fund investors. We are dependent on dollars, not rupees, and should not pretend otherwise. We need to disincentivise SIPs and incentivise foreign capital.

If the stock market crashes as a result, so be it. That is preferable to a collapsing currency, evaporating reserves and skyrocketing interest rates. No stock market crash has ever ruined a nation, but currency and interest-rate crises have.

We have to choose wisely. For two years, I have repeatedly argued that SIPs could cause a macroeconomic disaster. Look at what is happening today. Unless we act, there is a train wreck ahead. We restricted gold because it drains foreign exchange. SIPs, in my view, are doing the same on an even larger scale. India’s FX reserves are not a war chest; they are a powder keg.

Are higher interest rates going to become another burden for households?

Very possibly. We have enjoyed low interest rates for some time, but the spread between Indian and US 10-year government bond yields is now extremely narrow. That spread needs to widen. Will US yields collapse? Highly unlikely, for several reasons. The more likely outcome is that Indian yields rise.

The RBI has kept Indian bond yields artificially low for a long time. Think about it – the rupee has fallen almost 20% in two years, yet bond yields have barely risen. How is that sustainable?

For yields to reach more sensible market levels, the Indian 10-year yield will have to rise substantially. That will eventually translate into higher interest rates across the market.

Equity markets aren’t compensating households either. What should they do?

Equity markets are not in the business of compensating anyone, least of all the average household. They owe you nothing — not a profit, not the return of your capital and certainly not a return on that capital. They do not owe anyone a living, either.

Yet plenty of people have made an extraordinary living from equity markets. The irony is that many of them are sellers of equity-market services, like asset managers, wealth managers and mutual fund distributors. Investors have not acquired yachts—not even dinghies—while the sellers of these services have acquired penthouses and private jets. There is nothing inherently unfair about that. It is simply how I see the equity market working.

Equity markets were never designed to enrich the masses. In my view, they tend to do the opposite: strip wealth from the many while making a few fabulously rich. It is a brutal zero-sum game, even though the sellers of financial services insist otherwise.

Understand that basic truth, and you have a better chance of ending up among the wealthy minority rather than the majority who, I believe, will become poorer through equity markets.

Are Indian equities facing a more fundamental problem than just foreign selling?

There is no fundamental problem specific to Indian equities. They are behaving exactly as equity markets tend to behave, which is delivering poor returns for much of the time and exceptional returns during relatively brief periods.

Consider the narrative that Indian equities deliver 12-15% compound annual returns over decades. That figure does not account for taxes or risk. Adjust for both, and I estimate the annual return at roughly 7-8%. Even that is not guaranteed.

More fundamentally, those headline returns rest heavily on one exceptional period: the roughly 55% compound annual growth rate during UPA-I, between 2004 and 2007. In my view, that was the only truly convincing bull market we had seen until recently. The Harshad Mehta and dotcom booms were narrow and lacked earnings support.

The post-pandemic bull market was the second, but it delivered returns about 40% lower between 2020 and mid-2024. Across roughly 41 years of Sensex history, we have had only about seven years of strong, defensible bull markets. The rest were fleeting, often over before investors could participate. In other words, genuine bull markets have occupied only around 15% of the period.

This time, the problem has been the scale of the marketing—YouTube, AMFI (Association of Mutual Funds in India) and the rest. The ‘Mutual Funds Sahi Hai’ campaign should go down as one of the most misleading campaigns ever. Sahi from what angle? Sahi for whom? Are we supposed to take financial advice from Sachin Tendulkar and Rohit Sharma?

My ‘Lake of Returns’ theory predicted roughly five years of near-zero returns for mainstream indices starting in mid-2024. That, I believe, is what is playing out. There is nothing unusual about it. It is the nature of the beast.

So, should investors not continue their SIPs?

Thankfully, I am no longer in the business of giving financial advice. But I believe mutual fund SIPs are fundamentally the wrong product for India. In my view, they work well only in one market – the US. The reasons are critical, but that is a discussion for another time.

Suffice it to say, I expect SIPs to disappoint investors. That is simply how I see it.

So, where should households put their savings in this environment?

Fixed income, gold and selective investments in real estate. I have recommended this approach to friends and family, including my sister, for decades. They seem happier than equity investors.