After a steady rally in the past week, the Indian equity market has been seeing a correction this week, which has resulted in a decline in the prices of new-age tech stocks like Paytm, Zomato, and Nykaa. 

The correction comes amidst the escalating tensions between India and Canada this week, leaving many to wonder if it has a role in the decline. However, market analysts believe that the issue, as of now, is unlikely to have any impact on the Indian stock market.

Before delving deeper into the market view, let’s understand the reason behind the discussion. 

Canadian pension funds such as Canada Pension Plan Investment Board (CPPIB) and CDPQ are among the largest institutional investors in Indian companies in major sectors, including banking and energy. 

In fact, CPP Investments, which manages the Canada Pension Plan Fund, ended FY23 with net assets worth around INR 1.3 Lakh Cr in India, which includes its investments in listed startups such as Zomato and Nykaa and companies like Kotak Mahindra Bank and IIFL Wealth. 

Besides, CPPIB has investments in many unlisted Indian tech startups including ACKO, VerSe Innovation, and BYJU’S, while CDPQ counts PharmEasy and private equity firm Fundamentum among its investments in India.

It must be noted that the CPPIB has increased its stake in most listed new-age tech startups in the recent past, picking up shares being offloaded by early investors. 

For instance, in November and December last year, CPPIB was one of the major buyers after Lighthouse India Fund III and Kravis Investment Partners offloaded their stakes in Nykaa. 

India-Canada Ties Sour

The issue between the two countries began earlier this week after Canadian Prime Minister Justin Trudeau said his country was looking into “credible allegations potentially linking” the Indian government to the assassination of Sikh separatist leader Hardeep Singh Nijjar in a Canadian province this year. 

India called the allegations “absurd and motivated” and expelled a senior Canadian diplomat from India hours after Canada expelled a top Indian diplomat. The tensions between the two countries have only escalated since then, with the Indian government also suspending visa services in Canada temporarily with immediate effect on Thursday (September 21).

Amid all these, benchmark index Nifty 50, which crossed the 20,000 mark for the first time last week, fell 2.23% in three consecutive sessions this week, closing at 19,742.35 today. Sensex also fell in three straight sessions.

Meanwhile, Zomato fell in three sessions, ending today’s trading at INR 99.2 on the BSE. A similar trend was observed in Nykaa and Paytm. While shares of Paytm declined 1.55% to end at INR 839.85 on the BSE on Thursday, Delhivery, which rose 0.6% yesterday despite the pressure on other stocks, fell 0.4% today.

It must be noted that Indian startups are no stranger when it comes to geopolitical issues impacting them. Following the border clashes between Indian and Chinese soldiers in 2020, the Indian government started closely scrutinising Chinese investment. Amid all these, a number of Chinese investors exited Indian startups. 

Meanwhile, the Russia-Ukraine war last year led to the onset of a funding winter in the Indian startup ecosystem which has dried up capital for Indian startups, resulting in mass layoffs and many startups shutting operations.

However, experts believe that the ongoing tensions between India and Canada are unlikely to have any such major effect on Indian startups.

No Impact On Stocks?

Commenting on the worsening relations between India and Canada, Prashanth Tapse, senior VP (research) at Mehta Equities, said the issue is unlikely to have any major impact on the stocks CPPIB has invested in on a fundamental level. However, these headlines do keep markets under pressure.

Tapse believes that the markets are currently reacting to the escalation from both sides, but its effect will die down soon.

“There will be no fundamental change in the story of Canada Investment Fund’s investment in India. Before taking any call to exit India due to the political turmoil, that will be well communicated and also taken care of by the Indian government,” Tapse said.

Meanwhile, Parth Nyati, founder of stock trading platform Tradingo, also believes that the market is currently unfazed by the tensions between India and Canada. 

“Despite the significant investments made by the Canada pension fund in the Indian equity market and the exposure of many Indian IT companies to the Canadian market, the market seems to be taking a more composed stance, viewing the issue primarily as a political one,” said Nyati. 

He said the issue is unlikely to have any substantial impact on trade relations between the two countries.

“Pension funds, known for their long-term investment perspective, typically do not react hastily to such geopolitical events. They maintain a strategic outlook and are likely to wait for developments before making any major adjustments,” he said, adding that it’s crucial for investors to remain steady and avoid succumbing to any panic.

Meanwhile, analysts are of the opinion that the decline in the domestic markets this week is more in response to the hawkish stance of the US Fed as interest rates are now expected to remain higher for longer.

[Edited By Vinaykumar Rai]