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Indian indices jumped almost three per cent on Friday, their highest single-day gain in 22 months, as the rupee rose for a second straight day and foreign investors turned net buyers for the first time since June 11.
The equity markets were led by a rally in energy stocks, after the government approved nearly doubling of natural gas prices from April 2014.
Renewed expectations that the US Federal Reserve might not roll back its stimulus package soon also helped stocks and the rupee extend gains. Domestic gold fell to a near 23-month low on Friday due to the rise in the rupee. Silver also breached a near-31-month barrier.
Fund managers, economists and brokers, however, warned against concluding that the worst could be over for the economy and the markets. Indian stocks and the rupee remained vulnerable to any indication of the US economy strengthening, which could revive chatter of the Federal Reserve cutting down on the third round of its mega bond-buying programme, known as quantitative easing (QE3), and firm up the dollar further. This could worsen the country’s current account deficit, which could drag down the rupee again.
“Nothing has changed for the market, as the risks to the economy remain,” said Anand Shah, chief investment officer, BNP Paribas Mutual Fund. “The government has to keep implementing measures that send the right signals to the markets and foreign investors, to ensure that the rupee does not fall sharply further.” (Greener pastures)
The rupee, which slumped to a record low of 60.73 to a dollar on Wednesday, gained 1.3 per cent on Friday to close the day at 59.39.
The BSE’s Sensex rose 519.86 points or 2.75 per cent to close at 19,395.81. The NSE’s Nifty gained 159.85 points or 2.81 per cent to close at 5,842.20. The gains on Friday were the highest in a single day since August 2011.
“Fundamentals cannot change in a matter of weeks,” said Sajjid Chinoy, India Economist, JPMorgan. “Recent weakness in the rupee has been driven both by fundamentals but also self-fulfilling expectations… and the interplay between the two can be a potent cocktail. Policymakers need to step in to address the latter.”
Weaker-than-expected US economic growth in the first quarter and a comment from a Fed official that the tapering of QE3 would depend on the extent of the recovery helped global markets recover in the last couple of days.
Foreign institutional investors (FIIs), which have sold shares worth almost Rs 12,000 crore since June 11 on worries over QE3 slowing, bought to the tune of Rs 1,124 crore on Friday. The purchases by FIIs are no indication of their renewed interest in Indian equities, said brokers.
“FIIs will be in a wait-and-watch mode, though global markets and the rupee have stabilised a bit. This is because the medium-to-long-term outlook for the rupee is still weak,” said Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services.
BNP Paribas’ Shah said India remained vulnerable, especially on the external front, to possible collateral damage if the US central bank starts tightening rates.
A Bank of America-Merrill Lynch report said the Reserve Bank of India will have to augment foreign exchange reserves to stabilise the rupee. The country’s foreign exchange reserves, about $287 billion, can provide cover for six and a half months of imports. “We believe RBI, sooner or later, will need to augment FX reserves by, say, issuing NRI bonds. After all, we estimate that the RBI cannot sell more than $30 billion to defend the rupee,” BofA ML said.
JPMorgan’s Chinoy said India will find it challenging to finance its current account deficit, with hardening treasury yields and rising credit spreads. “Perversely, India has to hope that the US economy does not reach escape velocity soon and the Fed’s monetary accommodation is extended,” he said
Spot gold fell 3.38 per cent or Rs 880 on Friday to close at Rs 25,130 per 10 g, the level it had previously seen on August 8, 2011.
The fall in silver, however, was capped as investors saw potential for only limited pullback from the current level in the precious metal. Consequently, silver recorded a marginal 0.64 per cent, or Rs 260, fall to close the day at Rs 40,190 a kg, against Rs 40,450 a kg the previous day.
