Gush of liquidity: 5 factors that helped Nifty cross 10,000

Nifty50 index scaled the 10,000 mark for the first time in history in opening trade on Tuesday. It took 91 sessions, or 4 months, for the index to rally 1,000 points – from 9,000 mark to hit 10,000 levels

Thus far in July, the Nifty50 index has gained nearly 500 points, or over 3%. From a closing level of 8,185 on December 30, 2016, Nifty50 has gained 1,815 points, or 22%, thus far in calendar year 2017 (CY17), and has become the best performing market globally during this period.

Here are five reasons that have triggered the recent rally:

Sharp rally in index heavyweights: The Nifty50 rally, in most part, has been fuelled by a sharp rally in Reliance Industries Limited (RIL) that has moved up over 10% thus far in July; and zoomed over 44% since the start of calendar year 2017 (CY17). The last leg of the rally was fuelled by RIL’s results that were in line with expectations. The surprise element according to analysts, however, was the 1:1 bonus announcement by the company at its 40th Annual General Meeting (AGM) last week and the launch of a 4G feature phone.

"RIL reported standalone financials in line with expectation. However, GRM of USD11.9/bbl was higher than our estimate. RIL announced launch of its Jio phone which is targeting current pool of 530 million feature phone users. Current paid subscriber base has improved to 100 million. Going further, Telecom would be a major driver of stock performance," says a note from Motilal Oswal Securities.

ITC, too, contributed a significant part with a gain of around 22% on year-to-date basis, as per ACE Equity data. RIL and ITC have a 7.65% and 6.36% weightage in the index.

Interest rate cut expectations soar: With the latest consumer price inflation (CPI) print moderating to 1.5% y-o-y in June from 2.2% in May, expectations have soared for a rate cut by the Reserve Bank of India (RBI) in its upcoming policy review on August 2. 

“On a seasonally adjusted basis, we estimate that momentum in ‘core core’ inflation moderated in June and our trimmed mean measure also eased to 3.5% y-o-y from 3.8% in May. Discounts by retailers (clothing & footwear, household goods) and a sharp moderation in education price inflation (tuition fees) were responsible, confirming a more broad-based moderation in prices,” wrote Sonal Varma, chief India economist at Nomura in a note.

Since April, CPI inflation has been surprising to the downside and the June inflation print came at 1.5%, which is 50bps below the lower band of RBI’s mandated target of maintaining inflation within the 2%-6% band.

“Given the lower-than-target June inflation print, we think the central bank will be able to justify a 25bps rate cut in the August monetary policy,” says Kaushik Das, director & chief economist – India at Deutsche Bank Research.

Absence of global negatives, especially the US Fed: The US Federal Reserve chair, Janet Yellen, in a recent testimony hinted at a gradual rate hike during the year and plans to start trimming its bond holdings. In her semi-annual testimony to the Congress, Yellen sounded cautious on the inflation outlook. She said that though the US economy is healthy enough for Fed to raise rates, a low inflation rate and low neutral rate may leave the central bank with diminished leeway.

The developments, analysts say, were expected given the inflation trajectory and are already priced in by the markets.

Gush of liquidity: The sharp rally in Indian equities in CY17 has been fuelled by the gush of liquidity – both from foreign investors and domestic institutions / mutual funds. Collectively, they have pumped over Rs 97,000 crore in the equity segment thus far in CY17. As a result, the benchmark indices have rallied nearly over 20% year-to-date (YTD) to become the best performing market globally.

Monsoon forecast: The south-west monsoon showed strong signs of revival across parts of the country with the week ending on July 19, recording 11% excess rainfall. According to the latest weather update by the India Meteorological Department (IMD), India received 75.3 millimetres (mm) of rainfall from July 12 to July 19. According to the IMD, the country was expected to witness 67.6 mm of rainfall.

A normal monsoon, analysts say, will help keep inflation under check and can lead to a cut in interest rates by the Reserve Bank of India.