Benchmark indices are near the upper-band, indicating that the current rally may not last long.
Even as the world seems to grapple with calamities — manmade and natural — India is looking relatively better. The benchmark indices are up by 9.56 per cent since the closing on March 18 (Friday). Apart from cheap valuations, there are other domestic factors that have led to the current rally.
Says Rakesh Arora, managing director and head of research, Macquarie India, “There are several factors for this relief rally that has occurred, mainly short covering. The inflation growth has stabilised at 9 per cent. Even crude oil has not risen sharply.”
In March itself, foreign institutional investors (FIIs) have bought equities worth almost $1 billion, so it’s not surprising that the markets have moved up. Given that India is a very shallow market, an outflow or inflow of a billion dollars can make a big difference to the sentiment and consequently indices.
|
NET INVESTMENT | ||
| Yr ‘11 | FIIs | DIIs |
| 21-Mar | -97.02 | 47.98 |
| 22-Mar | 236.29 | 96.04 |
| 23-Mar | 312.10 | 1111.68 |
| 24-Mar | 307.82 | 378.12 |
| 25-Mar | 1446.18 | -313.77 |
| 28-Mar | 890.02 | -286.52 |
| 29-Mar | 1291.54 | -474.17 |
| 30-Mar | 739.61 | -615.34 |
| 31-Mar | 3324.59 | -1716.85 |
| Total | 8451.13 | -1772.83 |
| Data compiled by BS Research Bureau Source : BSE | ||
Long-term overseas funds chase growth and stability and the Indian rupee has shown a kind of resilience that is rare for an emerging market currency which has relatively high levels of deficit. The domestic currency extended its rally against the US dollar, Japanese yen, and euro, while it fell against the pound. Says Ramit Bhasin, managing director and head of equities at RBS India, “India has gotten very cheap over the last few months, when the Sensex fell from 21,000 levels to 18,000, due to fears of high inflation, high fiscal deficit and rising crude oil prices.
But all through these crises the rupee has held on and appreciated. The rupee tells you that the India story is sustainable.
In comparison, the US’s quantitative easing-2 (QE2) is seemingly not working to expected levels. The dollar has been in free fall since February. The greenback has collapsed by 6 per cent against other benchmark currencies over the last two months. Says Gopal Agrawal, head equities at Mirae Asset India, “The dollar’s depreciation recently is a big reason for the bounce-back in the markets.”
Another big factor that has driven up the markets in the last few weeks is the falling certificate of deposit (CD) rates. Banks are now able to raise funds through CDs for three months at 9.65 per cent, as compared to 10.10 per cent a week ago. For CDs maturing in a year, the rates have come down to 9.85 per cent from 10.15 per cent. What this essentially means is that interest rates are now peaking out. This has been a big trigger for interest-rate sensitive stocks like banking, capital goods, construction, automobile and real estate. All these sectors have done well. Stability in crude oil prices over the week have also helped.
While the rally is heartening and some macro indicators look positive, many concerns still persists and will haunt the markets over the next few months. Says Arora, “The next three months will have a lot of negative news. This will include not-so-exceptional corporate news, fall in demand leading to fall in volumes, higher interest cost leading to more requirement for working capital. The market will take time to digest this.”
Arora does not see much upside from here and believes profit-booking is likely to come in. Over the next few months he expects the BSE Sensex to range 17,500-19,500. After that, there would be a break-out, either way, depending on monsoon and other news.
Other experts also share similar views. Nilesh Shah, President, Axis Bank, says, “This is a momentum-driven rally. After seeing two extremes, the rise and the fall in Sensex between 17,500 and 21,500, this is the consolidation period. During the rise, investors ignored inflation and other negatives. And during the fall, they ignored that we are discussing rating upgrades in India unlike downgrades elsewhere.”
Gul Tekchandani, an investment consultant, adds, “The Nifty has been hovering between 5,300 to 6,000 for some time. And this trend is likely to continue for some time. The market will form a new base for the next few months.”
