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The FTSE All-World index hit a six-year high, led by Chinese equities, after President Xi Jinping unveiled a plan that charted a shift of the world’s second-largest economy from a state-controlled model to a market-driven one. The fact that Janet Yellen, expected to be the next US Federal Reserve chief, sounded in no rush to scale back stimulus added to the bullish fervour.
Following China’s reform proposal, investment bank UBS upgraded that country to ‘overweight’ — but that was at the expense of India, which was downgraded to ‘neutral’. The UBS downgrade, however, did little to dent sentiment at domestic stock exchanges and the benchmark indices posted their highest daily gains in a month on optimism the Fed would stretch its bond-buying programme, the Quantitative Easing (QE)3, in its current form.
The BSE Sensex rose 451.32 points, or 2.21 per cent over its previous close, to end the day at 20,850.74. The NSE Nifty gained 132.85 points, or 2.19 per cent, to 6,189.00. Banking shares led index upsides ahead of the Reserve Bank of India’s Rs 8,000-crore open-market operations, which involve bond buying, later on Monday. The banking index rose 3.2 per cent.
The elevated level of benchmark indices is worrying some market participants, who perceive the current optimism is too stretched.
"This rally does not have a long shelf life. As of now, there are too many imponderables for markets to see such a strength," said Dalton Capital India Managing Director U R Bhat. "We are rejoicing a bit too much because QE3 tapering is just a question of time. The more the markets rise ahead of the QE3 tapering, the more likely are we to be vulnerable to selling by foreigners," he added.
Investors will closely watch Fed Chairman Ben Bernanke's speech on Tuesday for hints on the direction on its monetary policy. On Wednesday, Fed will release the minutes of its October policy meeting. Investors might go through those very carefully for indications on the much-feared QE3 rollback.
Foreign institutional investors (FIIs) stepped up purchases of Indian equities, pumping in about Rs 1,150 crore into the country's stocks on Monday, according to provisional data. This was after Janet Yellen, the nominee for the US Federal Reserve chairperson's position, last week signalled Fed might continue with the QE3.
FIIs, which have bought over Rs 2,000-crore shares so far in November, have been net-buyers for 28 straight days. In October, these investors had bought to the tune of Rs 18,000 crore.
The continued buying of stocks by FIIs on Monday also boosted the rupee, which strengthened 70 paise, or 1.1 per cent, against the dollar to close at 62.42. The Indian currency had opened at 62.86 a dollar and, during intra-day trading, touched a high of 62.38 and a low of 62.91 a dollar.
"The overall domestic climate has not changed. So, the rupee might not strengthen beyond 62 a dollar in the near term. It may trade in the range of 62-62.80 a dollar," said N S Venkatesh, chief general manager and head of treasury, IDBI Bank, and chairman of the Fixed Income Money Market and Derivatives Association of India.
Based on technical analysis, JPMorgan expects Indian stocks and the rupee to underperform peers, after 'solid performance' in recent months.
"We see downside, as well as underperformance risks, in the short term. A post-summer outperformance within a broader downtrend has ended and MSCI India relative index is expected to resume underperformance," said JPMorgan's Bharat Iyer in a client note. "A bearish rupee outlook adds to an underperformance view," he said. The firm recommends short positions on the Nifty.
"Nifty's remarkably strong rally, despite a weak macroeconomic backdrop, appears to have come to an end for now and we see the 6,357 (January 2008) top as a difficult one to break out of," Iyer said in the note.
