Indices hit 4-month high despite worries; Sensex rises 465 points

FPIs return but fears of Fed tightening remain

The domestic equity markets hit their highest levels in nearly four months on Monday, following a revival in overseas investors’ inflows and a fall in commodity prices.

The Sensex gained 465 points, or 0.8 per cent, to close at 58,853 — its highest closing level since April 11. The Nifty50 ended the session at 17,525, following a gain of 127 points, or 0.7 per cent.

In the past 17 trading sessions, the Sensex and the Nifty have ended with losses only on three occasions (all the three losses were less than 1 per cent each). The rebound from June lows has shown little signs of ebbing, thanks to positive flows from foreign portfolio investors (FPIs), even as there are concerns about expensive valuations. 

The benchmark indices are up nearly 15 per cent from their 13-month lows on June 17. India is the best-performing global market during this period; the US is in second place.

FPIs on Monday bought shares worth Rs 1,450 crore, even as their domestic counterparts were marginal sellers. Since July, FPIs have pumped in Rs 22,000 crore ($2.7 billion) into domestic stocks.

“FPIs have become net buyers after a long time. And quarterly results of companies have not been that bad. Expected growth numbers from India are good. The rate hikes may reduce the allocation to emerging markets. Still, the relative position of India among emerging markets will be much better. There is a general feeling among investors that India will be an outlier as far as the slowdown is concerned," said U R Bhat, co-founder of Alphaniti Fintech.

“There is a turnaround in FPI flows this month. This shift is based on a few assumptions that are yet to fortify -- we are past the peak inflation in the US and the Fed is likely to turn dovish after 2022 (Fed pivot.) We are not yet confident that inflation is likely to drop to the Fed's comfort level this year and whether recessionary trends are broad-based in the US Economy. So, the current turnaround in the stance of FPIs with regards to India is yet to be confirmed. However, we believe a large part of FPI selling in India is past us and we will monitor the growth-inflation dynamics for a quarter to be certain,” said Kunal Valia, chief investments officer-listed investments, Waterfield Advisors.

The fall in commodity prices, especially crude oil, has helped assuage inflation fears. Brent crude prices were trading at $97.10, around 20 per cent below their levels in early July. The decline in crude prices gives some legroom for India vis-a-vis inflation as the country is a net importer.

Bhat pointed out that the markets have gone up a lot despite multiple headwinds. “It seems the market is living in denial. It is not good news but the absence of bad news that is behind recent gains."

Most global markets have rallied since mid-June in hopes that a weakening economy shall force the Fed to go easy on rate hikes. The better-than-expected earnings by some large global companies also eased fears of a recession in the US and Europe.

However, the stronger-than-expected US non-farm payroll data last week once again strengthened the case for more Fed monetary tightening. The US economy in July added 5,28,000 non-farm jobs in July. The unemployment rate returned to 50-year lows – a level earlier reached before the start of the pandemic.

Investors are waiting for inflation numbers due this week for further clues. Analysts said the US consumer price inflation has to be lower for investors to feel reassured about a not-so-aggressive tightening by the Fed.

Meanwhile, Fed officials, in their recent statements, have hinted that the US central bank shall keep considering large hikes until inflation meaningfully declines.

San Francisco Fed President Mary Daly on Wednesday said the US central bank is far from being done yet with regards to bringing down inflation.

Meanwhile, China's extended military drills around Taiwan are also raising worries about heightened tensions in the area and are putting pressure on the US to respond.

The market breadth was strong, with 1,894 stocks advancing and 1,613 declining. The broader market, mid- and small-cap indices underperformed, gaining just a quarter of a per cent. The gains in the benchmark indices were accentuated by a rally in index heavyweight HDFC Bank, which rose 2.4 per cent and made the biggest contribution to Sensex gains of 134 points. Reliance Industries, which rose 1.3 per cent, made the second-biggest contribution of 100 points.