Monsoon, Greece optimism keep markets upbeat

Sensex, Nifty gain for a seventh day as banking stocks surge on rate cut hopes

Indian markets rose for a seventh consecutive day, led by banking stocks, as the progress of the monsoon raised hope of further monetary easing by the Reserve Bank of India (RBI). A strong rally in global stocks and bonds, following Greece giving its international creditors a new proposal to avert a default, boosted the appetite for risky assets.

On Monday, the benchmark Sensex closed at 27,730.21, up 414.04 points, or 1.52 per cent, the most since May 4. The 50-share Nifty added 128.15 points (1.56 per cent) at 8,353.1.

Monday’s rally saw the Indian market complete a V-shaped recovery in June. The benchmark indices had plunged to their lowest in eight months after a 5.5 per cent correction early this month, owing to concern about a weak monsoon and fear of a rate increase by the US Federal Reserve. But as the monsoon has shown dramatic progress and the US Fed has hinted the lifting of rates will be gradual, the Sensex and the Nifty have gained 5.3 per cent in the past seven sessions.

On Monday, both the indices ended at their highest levels since June 1.

“Clearly, this is a relief rally on the back of reasonable progress of the monsoon so far, the postponement of a rate hike by the US Federal Reserve and weakening of the Chinese stock markets,” said Saurabh Mukherjea, chief executive (institutional equities), Ambit Capital. “Local investors are anticipating higher inflows into the Indian market due to the fall in Chinese markets,” he added.

The Chinese market fell 14 per cent last week, its worst weekly performance in seven years. The stock market capitalisation in China has surged about three times since 2014, sparking fear that the market might have entered a bubble territory. Many believe the fact that the Chinese market has turned unattractive will provide a boost to Indian stocks.

On Monday, foreign institutional investors (FIIs) turned net buyers of Indian stocks, the first time since June 1. According to provisional figures provided by exchanges, FIIs bought shares worth Rs 651.31, after pulling out about Rs 6,000 crore in the previous 14 sessions. The banking sector index rose about three per cent on Monday, the most since May 13, led by a rally in Axis Bank, ICICI Bank and State Bank of India.

Between June 11 and June 17, rainfall has been 20 per cent above normal, according to data provided by the weather department. In its monetary policy statement earlier this month, RBI had provided a cautious guidance, citing monsoon-related risks. It is expected the improvement in the monsoon will provide the central bank more room to cut policy rates. Mukherjea said the market might be able to sustain gains till the first quarter earnings announcements, expected to start in mid-July. “There is still an underlying weakness in the Indian economy. The rally might last till corporates start announcing first-quarter results,” he said.

Prabodh Agrawal, president and head (research), IIFL Institutional equities, said valuations didn’t seem overly stretched, especially if earnings met expectations of a revival in the second half of this financial year. “If you look at the prospective earnings, we are trading at around 16 times the earnings, which are only slightly higher than the long-term average. Also, the trailing price-earnings is not too much above historical valuations....If there is an earnings revival in the second half of the year or in FY17, the valuations will look a lot more reasonable in hindsight. For our coverage universe, we expect 21.5 per cent growth in profit after tax in FY16,” he said.