Ruchir Sharma: Falling earnings and rising inflation could dampen India’s equity festival

These warning signs will not emerge any time soon, Sharma said, as “inflation still seems to be relatively well contained and we are not seeing any clear signs of a major decline in earnings.”

While there are signs that earnings at medium-sized and small companies are sluggish, overall earnings are relatively good, Sharma said.

The former chief investor at Morgan Stanley cited earnings growth as one of the factors driving the Indian markets. “It's been a very broad-based rise, at least in the equity market.”

“In India, various sectors have performed well, so it seems reasonable to assume that the economy is on the right track,” Sharma said.

This growth has been fuelled by India's increasing financialisation, he added. “People in India hardly owned any stocks anymore and have now become accustomed to putting money into stocks every month whenever the stock market falls.”

This financialization has resulted in India now trading at a significant premium to other emerging markets.