Mumbai: Indian equity indices rose to their highest since October as investors rushed to buy stocks, tracking global markets after a four-day break and on indications that a recovery may be on.
India’s most widely tracked equity index, the 30-stock Sensex of the Bombay Stock Exchange, gained 731.50 points, or 6.41%, to close at 12,134.75.
The broader 50-stock Nifty of the National Stock Exchange rose 180 points, or 5.18%, to close at 3,654.
Sensex’s 6.41% rise was the highest gain in a day since 31 October when it went up 8.22%. The index was also the highest gainer on Monday among emerging markets.
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Brokers and fund managers said many investors had unwound their positions ahead of a four-day break in trading last Wednesday and were taking new positions. There was no trading last Thursday and Friday on account of elections in Mumbai, India’s financial capital, and Maharashtra Day.
“It was a pent-up rally and there was accumulated fund flow,” said Ved Prakash Chaturvedi, chief executive of Tata Asset Management Ltd, which manages assets worth Rs19,438 crore. “There was also a fair bit of short covering.” Short covering refers to the act of investors buying shares to close out short positions.
In a clear indication that risk appetite has returned, foreign institutional investors or FIIs, the main driver of Indian equity markets in 2007 and 2008, have also started coming back, buying as much as $1.96 billion worth of stocks since 9 March, when the current rally started.
Thursday and Friday saw overseas markets continuing their rally. Taiwan’s benchmark index rose 6.74% on Thursday while Indonesia’s key index rallied 4.78%.
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While the trigger for a 6.41% swing in the Sensex may have been the long weekend, the fundamental factors were already in place, analysts said.
“There is a sense that the economy has bottomed out and pace of decline among Western economies is slowing,” said Prateek Agrawal, head of equities at Bharti Axa Investment Managers Pvt. Ltd. “Interest rates have come down significantly and money has started flowing to companies.”
On Monday, there was further confirmation that the economy may have turned the corner after a rise in the purchasing managers’ index, or PMI, an indication of coming growth in the manufacturing sector. The ABN Amro Bank PMI rose to 53.3 in April, its highest in seven months. The new orders index surged to 54.9 in April from 49.5 in March. A reading above 50 shows expansion.
The PMI comes ahead of official statistics. “The rebound suggests a pick-up in domestic demand, even as external demand remains sluggish,” said Nomura Financial Advisory and Securities (India) Pte Ltd in a 4 May report.
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Exports have fallen for six consecutive months, dipping 33.3% in March compared to a year ago. “We judge that inventory restocking in Q2 09 along with a boost to domestic demand from fiscal stimulus and rate cuts could be driving this rebound,” the report said.
Domestic auto and cement companies, regarded as proxy indicators of economic growth, continue to report improvement in sales after the Union government announced three stimulus packages amounting to Rs1.6 trillion, or 3% of gross domestic product (GDP).
India’s central bank has cut its key policy rate six times since October to ease the flow of credit. Since then, its policy rate has come down from 9% to 3.25%.
India is not the only emerging market to see these so-called “green shoots”. Consumer confidence in the US is increasing and the purchasing managers index in China rose above 50 for the first time in 10 months, showing that manufacturing might improve in the largest emerging economy.
On Monday, US markets opened up. The Dow Jones Industrial Average was trading at 8,379.03 at 8.13pm India time, 2.03% up from its previous close. Meanwhile, other research reports on India suggest very much the same pointing to an improvement in lead indicators such as monetary policy, foreign exchange reserves, foreign fund inflows, inventories and money supply. Lead indicators are early signs of changes in economic activity as opposed to industrial production or consumption, which coincide with the economic cycle.
Goldman Sachs Group Inc. expects a recovery in economic activity by the second half of this financial year. In a 4 May report, economists Pranjul Bhandari and Tushar Poddar listed a pickup in domestic demand, loosening financial conditions, and declines in some key interest rate spreads as key reasons for optimism.
The Sensex’s 48.7% rise since 9 March, when the current rally started, is the highest among all key world markets. Hong Kong follows with a 44.4% rise and Taiwan with 43.26%.
Some economists, however, remain cautious about the sustainability of this recovery, citing uncertainties stemming from the general election that concludes on 13 May.
“The key risk to our view is the formation of an unstable coalition and the ratcheting up of long bond yields due to greater borrowing by the government to finance the post-election budget,” cautioned Bhandari and Poddar.
Ashwin Ramarathinam contributed to this story.
Graphics by Ahmed Raza Khan / Mint