Heavyweights Reliance Industries and Infosys Technologies, proverbial mills around the index's neck for long, have gained 18 per cent and 17 per cent, respectively, from their recent lows. A Rs 250-crore float by online directory service provider JustDial advised by global majors Citigroup and Morgan Stanley is back from the shelf. In its new package as a farmer-friendly measure, foreign direct investment (FDI) in retail looks set to sneak through topping a series of market-friendly measures, such as postponement of GAAR and retro taxes. A leading foreign brokerage has already launched a marketing drive splashing large advertisements in newspapers. Also, seasonal rains have picked up across the country.
What do you make of these seemingly unconnected events? For some bulls on the Street, these add up to a wavering red cape teasing them to charge. Lured by recent government sweet talk and led by the resurgent heavyweights, sentiments are already changing for the better on Dalal Street. If liquidity continues to be strong, the bovines may march ahead despite the uninspiring fundamentals, say some optimists.
On a day dominated by political posturing, the benchmark indices closed in the green with marginal gains. The Sensex gained three points to close at 17,850.22, while the Nifty ended 5415.35, adding close to two points to its overnight close.
“There is lot of undercurrent building up in the market, though this is not fully apparent in the index numbers. This is how teji begins,” said Harish Vasudevan of SVS Securities. “The index has been kept in a range due to issues with individual stocks, such as Reliance first, then Infosys and now Bharti. But this cannot go on for long as liquidity remains high,” Vasudevan added. He expects the Nifty to head towards the 5700-5800 levels.
Even mainstream fundamental analysts see an upside but in a slightly longer time frame. “A small reversion in the P/E and stable earnings growth could lift the Nifty by 20 per cent within four quarters,” said Anand Shanbag of Avendus Securities. Citi analysts Aditya Narain and Jitender Tokas, said “We continue to see market upside from current levels - but with a Sensex target of 18,400 (+ five per cent) by December 2012, expect only modest returns from here.”
The Sensex and Nifty are trading close to their five-month highs, despite a torrent of bad news in the form of communal disturbances in parts of the country and government facing heat over CAG reports.
More From This Section
In August alone, foreign institutional investors (FIIs) have bought shares worth Rs 6,227 crore, net of sales. Together with Rs 10,272 crore inflows seen in July, this has taken inflows for 2012 to over Rs 57,000 crore. Narain and Tokas of Citi said, “Foreigners continue to buy, while domestics remain sellers. This has probably dampened market moves on either side (contra investing pattern now in its third year); but it is the foreign investor/ flow that continues to drive the market.”
Shanbag of Avendus attributed some of these flows to the silver linings held out by “the resilience in FY12 earnings growth and, the yield-gap to the Libor nearing the low end.” He pointed out that twice within three quarters, FII buying rose when the gap fell near its low. “Another protective factor is the cyclical high in interest rates and inflation, and low in industrial growth,” Shanbag added.
Analysts feel a couple of moves from the lawmakers and the central bank will tilt the balance. “There are expectations of RBI cutting rates and some fiscal reforms from the government, such as a diesel price hike. That policy reform hope is pushing money,” said Devendra Nevgi, founder, Delta Global Partners.
The hurdles in the path of such a rally are also well known, said Shanbag. According to him, the key obstacles are macroeconomic factors, such as the triple deficits—budget, current account and monsoon rains—as well as inflation, interest rates and exchange rates.
While inflation continues to be a concern, the central bank is not in a position to ignore growth any longer, say some economists. Indranil Sengupta, chief India economist, Bank of America Merrill Lynch said in his recent note that he expected “the RBI to continue to ease liquidity to soften lending rates to support growth”.
Sengupta predicted that the RBI should resume OMO (open market operations) by September and cut CRR by 50 basis points (bps) on October 30. “The RBI will likely hold rates now, as agflation will push up inflation, and cut by 75 bps in the winter, once it abates. It should anchor the INR around 55/USD if the US dollar trades at 1.20s/euro.”
The copious inflows have helped pull the Indian currency from the 56 levels to a psychologically comforting 55. The recovery has also fuelled hopes the vicious cycle of sliding currency accentuating loss on falling stocks leading to outflows turning into a virtuous one of currency gains icing the stock market rally attracting more inflows. Other asset classes such as gold and commodities have also seen rallies.
Gautam Shah, chief technical analyst, JM Financial, said he remains positive on the short and medium term market. “In the current move, if we see 5460, there could be some volatility, which could take two to three weeks to stabilise.”