Mumbai: India’s benchmark equity index rose 2.2% on Friday to close at a 14-month high as investors rushed to buy stocks, enthused by the finance ministry’s move to relax external commercial borrowing (ECB) norms for companies and expectations of further policy changes related to financial services. The rupee also strengthened.
The 30-share bellwether equity index of BSE, the Sensex, logged a gain of 403.58 points to end at 18,752.83 points, while the broader market index of the National Stock Exchange (NSE) closed 2.46% up at 5,691.15 points. Experts said the reforms-driven rally was likely to continue and the market may climb further as there is plenty of money chasing stocks.
Indian markets gained the most on Friday even as most other Asian markets were positive, with the Hong Kong Hang Seng index gaining 0.7% and Japan’s Nikkei closing 0.25% up.
European markets, too, were mostly trading higher at the time of filing this report, except for the FTSE-100, which was in negative territory.
The US markets had closed flat the day before, with the Dow Jones gaining 19 points.
On BSE, 1,815 stocks advanced against 1,102 declines, with 32 stocks hitting new highs. The Sensex recorded the year’s biggest intraday gain of 517.62 points.
The local currency, which tracks equity movements, closed at 53.4700 to the dollar against 54.38 on Thursday, stronger by 1.67%. The rupee had strengthened to as much as 53.30 in intraday trade.
Infrastructure stocks linked to power led the rally with a 4.35% gain, following the easing of the process by which the benefits of a tax cut on ECBs can be availed.
Overseas borrowings by Indian companies through ECBs stood at $18.18 billion (Rs.97,990 crore today) till July.
The borrowing trend this year has been weak compared with last year when Indian companies mopped up $36.5 billion. A number of Indian firms, especially in the infrastructure and construction sectors, are already burdened with huge debt and have been shelving their expansion plans in the wake of a weak business environment.
The new tax norms will apply on borrowings by Indian companies between July 2012 and June 2015.
The announcement boosted power, infrastructure and construction stocks, with GMR Infrastructure Ltd gaining 10.64%, Reliance Infrastructure Ltd 9.48% and state-owned Bharat Heavy Electricals Ltd closing up 7.12% on BSE.
“Investors are pleasantly surprised by quick and far-reaching policy reforms in a way which cannot be reversed by the government. Liquidity is expected to continue as the US central bank has committed to a benign regime and keeping interest rates at near zero levels till 2015,” said Nirmal Jain, chairman of India Infoline Ltd.
Banking and financial services stocks were the second largest gainers on hopes of a further push to reforms in the coming days. Despite pressure from political allies, the Congress-led United Progressive Alliance government has indicated that it will continue with its reforms to attract investments. Last week, the government allowed foreign direct investment (FDI) in multi-brand retail and opened up the airline sector for investment by overseas carriers.
The government, on Friday, approved the Rajiv Gandhi Equity Savings Scheme designed to encourage first-time retail investors in equity investments. The investor will get a 50% tax rebate on investments made in the scheme, with the maximum investment capped at Rs.50,000. The scheme could attract retail investors who have refrained from putting money into equity so far due to weak markets and the uncertain domestic outlook.
“Retail investors should start building up portfolios. Fundamental economic indicators should start looking better in two-three quarters,” said Jain of India Infoline.
In the financial services space, non-state companies have been seeking an increase in the FDI limit in insurance. The proposal, part of the Insurance Bill, has been cleared by the finance ministry and the market expects cabinet approval for this soon. Higher FDI will mean more foreign money flowing into Indian insurance companies.
Foreign institutional investors (FIIs) on Friday bought Indian equities worth Rs.2,327.82 crore, according to provisional NSE figures. FIIs have bought Indian equities worth $14 billion during the year.
Financial services stocks are typically the first to follow market movements. On Friday, BSE’s banking index rose 4%, with private sector lender Axis Bank Ltd gaining 7.7%, Canara Bank 6.28% and Bank of India jumping 5.67%.
Market experts said the rally in Indian stocks will continue for now. Until last week, Indian investors had been cautious because of weak domestic fundamentals and a possible downgrade by global rating agencies.
“While we don’t expect any upgrades in India ratings, the fear of a downgrade has now gone away with the government pushing policy reforms. There is momentum in this rally and I think there is more room for upside because there are still short positions in the market,” said Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd.
“India’s long-term growth story should regain stability once fiscal deficit problems are solved,” he added.
“This is a reform-based rally with the FIIs pumping in money... I would not be surprised to see 6,000 levels on the Nifty in a fortnight or so. At those levels, there could be a correction. I would advise retail investors to have a long bias and traders to stay put with long positions, if any,” said Vijay L. Bhambwani, a technical analyst.