Mumbai: Indian markets rallied on Monday, with the benchmark Bombay Stock Exchange sensitive index, or Sensex, rising 474 points, or 2.7%, the highest gain in nine months. The rise in the broader market was sharper, with the BSE-500 index rising 2.9% but analysts are not certain how sustained the rally will be.
Short covering by investors amid falling political risk, participation by high networth individuals, who have started buying at lower levels, and positive cues from other Asian markets, all of which rose amid weakening crude oil prices, helped Indian markets rise for the second consecutive trading session.
The indication that there might be a joint parliamentary probe to investigate corruption allegations in the allocation of telecom spectrum lowers the risk of political instability and is a positive in the short run, said Rakesh Arora, head of research at Macquarie Capital Securities (India) Pvt. Ltd.
After its outperformance in 2010, India has been among the worst markets this year with the Sensex ending in the red in two of every three trading sessions as concerns over high inflation and governance issues spooked investors.
Analysts said that, more than any one positive trigger, the lack of negatives helped improve sentiment. They said the correction helped bring in new buyers as valuations were deemed attractive.
The Sensex had dropped to a seven-month low of 17,463 on 10 February, a fall of 17% from its recent closing peak of 21,005 on 5 November and forward price earnings had fallen to 16.6 times, below its historical average of 17 times.
“Valuation is the only trigger,” said Harendra Kumar, head of institutional equities at Elara Capital Plc. “The negatives in terms of high inflation and cost pressures are still there and I do not expect markets to touch new highs.”
The market rise on Monday was led by interest rate sensitive sectors such as capital goods, automobiles and banking, which have been the hardest hit in the correction this year.
“It is difficult to call the bottom, but with the markets trading at or below their historical multiples, we have been deploying cash in the past few weeks,” said Om Ahuja, head of wealth management at Emkay Global Financial Services Ltd.
While the markets may not fall further immediately, the Budget session as well as the direction of global flows would determine market sentiment, analysts said.
“The fiscal deficit and inflation numbers would be the key things to watch for,” said Ahuja.
Global funds have been allocating funds to developed markets attracted by the prospects of a faster global recovery and that has led to outflows from most emerging markets, including India.
“Recent outflows from emerging market funds were largely focused on ETFs (exchange-traded funds),” said Markus Rosgen, Citigroup’s Asia strategist, in an 11 February note. Historically, non-ETF outflows lag behind ETF flows by two weeks, the note added.
If the fund flow out of emerging market continues towards developed markets, the current pull-back could be short-lived. So far, however, the net sell-off of $1.6 billion in Indian equities this year is just 5% of the record $28 billion that these investors pumped into Indian equities in 2010.
“There has been no major sell-off so far by foreign investors,” said Vijai Mantri, chief executive officer at Pramerica Asset Managers Pvt. Ltd that has assets worth Rs1,108 crore.
Corporate earnings growth of 20% is likely to be met and as long as economic growth is intact, foreign investors would return to Indian markets in the next three to four months, if not immediately, said Mantri.
Siddhi Ramesh Bajaj and Ashwin Ramarathinam contributed to this story.