The bulls are having a great time on Dalal Street, as a surge of inflow from foreign investors has lifted India’s key stock market indices, the Sensex and the Nifty, to six-month highs. However, the swift rally in Indian shares in the past six weeks is largely driven by liquidity and not backed by any considerable improvement on the ground.
The Bombay Stock Exchange benchmark Sensex, gained 0.14 per cent on Monday to close at 17,772.84, as the Greek government won parliamentary approval for the austerity measures needed to obtain rescue funds. At the National Stock Exchange, the 50-stock Nifty index inched up 0.16 per cent to 5,390.20. After on Monday’s close, the Nifty has rallied nearly 19 per cent from its December 20 low of 4,531. The Sensex has gained 17.4 per cent from its December 20 low of 15,135.86.
However, the sharp rally has not convinced analysts that the fundamentals have started to improve. “India’s problems of governance, fiscal deficit and a weak balance of payments position are for real and unlikely to disappear quickly,” said Sanjeev Prasad, executive director and co-head at Kotak Institutional Equities, in a strategy note to clients. “We have not seen any visible signs of improvement in governance, although there is some urgency to address certain economic impediments.”
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The key reason behind the sharp performance of the stock market, says Prasad, is the strong inflows from foreign institutional investors (FIIs), due to the loose monetary policy of the European Central Bank (ECB). FIIs have pumped in Rs 20,332 crore ($4.06 billion) into Indian shares since January 1, shows data from the Securities and Exchange Board of India (Sebi). Last year, they’d pulled out a net Rs 3,418 crore, as high interest rates, governance deficit and corruption scandals soured investors’ mood.
The ECB in December pumped in $623 billion in three-year loans at one per cent interest in the banking system, reducing concerns about a credit crunch and helping to shore up demand in recent auctions in the euro zone. It will hold a similar auction of unlimited three-year cash on February 29. ECB’s massive liquidity injection has boosted sentiment for stock markets across the world. Hong Kong’s Hang Seng has soared 13.2 per cent, Brazil’s Bovespa has gained 14.4 per cent and Germany’s Dax has added 14.4 per cent in this year so far.
Experts believe the rebound in the Indian economy, policy reforms and a roadmap for fiscal consolidation is necessary for the rally to sustain. “It will be a tough grind from here, as the market waits for the economy to signal the recovery that equities have now partly factored in,” said Aditya Narain, managing director and head of India research at Citigroup, in a strategy note to clients. “India’s challenges, and potential upsides, lie at home; fiscal profligacy, high inflation, lack of policy/reform and execution challenges.”
Industrial production in December rose 1.8 per cent from a year earlier, signalling weak domestic demand. The government expects gross domestic product to grow at 6.9 per cent for the financial year ending March 31, the lowest in three years.