Mumbai: Markets rose 1.6% to their best close in nearly two weeks on Tuesday, bolstered by a rally in global equities after US consumer spending data eased concerns about the health of the world’s largest economy.
The gains were underpinned by data that showed India’s economy grew at 7.7% in the June quarter, its weakest pace in six quarters but better than gloomier predictions.
Investors were, however, circumspect ahead of a two-day market holiday.
“The market was oversold and some sort of value buying was expected specially since there was not much negative news flow from the overseas markets,” said Kaushik Dani, a fund manager with Peerless Mutual Fund.
Despite a two-day rebound, the outlook for Indian shares remained hazy, with economists forecasting another rate increase on 16 September when the central bank reviews policy.
“We are not out of the woods yet. The overall market mood will remain cautious in the near term,” Dani said, adding there was still lingering worries about the euro zone debt crisis as well as impact of rate hikes on the local firms.
The main stock index fell 8.4% in August, its second straight monthly drop and the biggest%age decline since January as rising rates and global economic uncertainty triggered a flight from risky assets.
Shares in index heavyweight Reliance Industries were the biggest gainer, rising 3.7% to Rs 782.60 on bargain hunting by institutional investors after the recent sell-off, dealers said.
Still, the stock ended down 5.5% for the month, taking its losses to 26% so far this year.
Infosys , India’s No 2 software services exporter, gained 2% to Rs 2,342.95 as the encouraging US data boosted prospects for outsourcing demand in its largest market.
The $5.2 billion HSBC GIF Indian Equity fund has recently bought Infosys and ICICI Bank shares, catapulting them into its top-10 holdings, its portfolio manager Sanjiv Duggal told Reuters.
The benchmark 30-share BSE index closed up 1.59%, or 260.42 points, at 16,676.75, after having risen as much as 1.8% during trade, with 24 of its components gaining. The broader 50-share NSE index ended up 1.65% at 5,001 points.
The index is down nearly 19% this year.
Concerns about a slowdown in the Indian economy had sparked a sell-off in the stock market in recent weeks. Morgan Stanley had earlier this month pared its growth forecast for the current fiscal year to 7.2% from 7.7% earlier.
RATES SEEN RISING
While India’s gross domestic product fell below 8% for the second straight quarter, the central bank is expected to continue with its monetary tightening to fight high inflation.
Deutsche Bank said in a research report while there was a lot of concern high inflation and interest rates would dampen economic activities, the June quarter growth number was not particularly weak.
It said there was a downside to its forecast of 8% growth in this fiscal year to March 2012, but the economy was not “on a path of further deceleration.”
“The latest growth number reinforces the view that although growth is slowing down, it is not collapsing as feared by some,” said Ashutosh Datar, economist at brokerage IIFL.
“Also, with full-year growth number still above 7%, it allows the central bank to keep focus on fighting inflation. Therefore, a 25 basis point rate increase on September 16 is very likely,” he said.
The central bank has raised rates 11 times since March 2010, including a sharper-than-expected 50 basis point increase last month, raising concerns about its impact on the margins of the companies.
K.K. Mital, head of portfolio management at Globe Capital, said the market mood had been helped by hopes the government would take up some of the long-pending reforms for discussion after an improvement in the political situation.
Massive anti-corruption protests that swept India in recent weeks may give impetus to a beleaguered government to push its reform process and help ailing economic growth and plummeting business confidence, analysts say.
Shares in leading financials including top mortgage lender HDFC rose 2.7% to Rs 662.65 and HDFC Bank ended 3.4% higher at Rs 471.95, after the stocks had fallen to their lowest levels since March.
But state-run explorer Oil and Natural Gas Corp dropped 4.2% to Rs 263.30, as investors were disappointed after the company’s board on Monday did not set a timeline for the launch of its follow-on share sale.
In the broader market, gainers were ahead of losers in the ratio of 2.6:1 on strong volume of 652 million shares.
The market is closed on Wednesday and Thursday for local holidays. Trading resumes on Friday.
Non-bank finance companies rose for the second day, after the central bank said it would allow private sector firms that do not have large exposure in the construction or broking sectors to apply for licences to set up banks.
Reliance Capital ended up 1.8% at Rs 384.20 and Mahindra & Mahindra Financial Services rose 1.6% to Rs 617.45.
Future Capital gained 4.3% to Rs 158.75 after sources told Reuters parent Future Group was in talks with a clutch of potential buyers including JPMorgan and KKR to sell the financial services arm.