Mumbai: India’s benchmark stock index vaulted close to 1,000 points this week, buoyed by rising fund flows and improved global cues, with Friday alone seeing the Bombay Stock Exchange’s (BSE) sensitive index, or Sensex, shooting up nearly 500 points.
•Surging Ahead (PDF)
But with crude oil prices and inflation remaining high, analysts expect markets to remain volatile. The Sensex rose 464.90 points to close at 18,815.64 on Friday, beating its peers, having risen 936 points, or 5.4%, over the week, its highest gain in 21 months.
“This is a temporary pull-back that keeps happening. With headwinds such as high crude prices, food inflation in double digits, and expected rate tightening, there is still a lot of uncertainty,” said Sadanand Shetty, vice-president and equities fund manager at Taurus Asset Management Co. Ltd, which has assets worth Rs2,533 crore.
Food inflation returned to double digits after a gap of two weeks, according to the latest data released on Thursday.
Stocks climbed across most markets of the world on Friday on the back of rising risk appetite, tracking US equities after initial jobless claims data signalled that unemployment in the world’s biggest economy is falling.
Short-covering by investors contributed to this week’s rally.
“The indices broke many of the technical barriers, including their 200-day daily moving averages, and that led to short-covering,” said Vinod Sharma, head of wealth management at HDFC Securities Ltd.
Short-covering takes place when traders who have sold shares they do not own in anticipation of lower prices buy them to close the open position.
Reasonably attractive valuations have led to a surge over the past few weeks as both local and overseas fund mangers increased their share purchases. In March so far, foreign institutional investors (FIIs) bought shares worth $539.19 million (Rs2,423.50 crore according to market regulator data) while local fund managers purchased shares worth $705.2 million, net of sales.
“Money waiting on the sidelines is now finding its way into Indian stocks as valuations have come down to attractive levels,” said Mumbai-based Prateek Agrawal, head of equity at Bharti AXA Investment Managers Pvt. Ltd, which manages assets worth Rs412 crore.
While FIIs have made net sales worth $1.67 billion so far this year, local institutions have bought shares worth twice that amount, net of sales. The Sensex currently trades at an average 17.6 times estimated earnings for fiscal 2011, slightly below its historical average for the past five years.
Indian markets have risen sharper than its peers in the past month. While the MSCI Emerging Markets Index rose 3.2% in in the past month, the Sensex has risen 6.3% over the same period.
The sharper rise, however, comes after months of underperformance, and the BSE benchmark still remains among the worst performing indices of the world after those of Egypt, Tunisia and Kuwait.
While many of the negatives relating to the domestic economy have been priced in, uncertainty on global events such as oil prices and the fallout of the Japanese earthquake might limit gains in the market, analysts say.
Friday’s market rise of 2.5% was led largely by information technology (IT) stocks. The BSE IT Index rose 4% followed by the technology index, which gained 3.49% after Oracle Corp., the US-based supplier of database software, reported third quarter profit that beat analyst estimates.
“The only sector in which there was some fundamental change is IT, where prospects appear brighter after US companies like Oracle and Accenture Plc delivered higher earnings growth,” said Saurabh Mukherjea, head of equities at Ambit Capital Pvt. Ltd. “Otherwise, with oil prices still at elevated levels, the market outlook has not changed significantly in the past week.”
Oil prices, inflation numbers and the political situation in Delhi would be the key determinants of market direction, analysts say. The government is battling corruption allegations even as it seeks to further its economic reforms agenda.
Bloomberg and Mint’s Ashwin Ramarathinam contributed to this story.
Graphics by Paras Jain & Ahmed Raza Khan/Mint