Mumbai: Equity indices hit record highs for the third successive session on Monday, and the rupee closed at its strongest level in seven months, as foreign institutional investors (FIIs) pumped more money into Indian equities and bonds, encouraged by improving economic data and expectations of a stable government emerging from the April-May general election.
The BSE’s 30-share Sensex rose 0.48%, or 104.19 points, to 22,023.98 points, a new high in intra-day trading, before closing at 21,934.83. The National Stock Exchange’s benchmark 50-share Nifty rose 0.54%, or 35.55 points, to register a new high of 6,562.20 points before closing at 6,537.25.
The rupee ended at 60.8425, the highest since 6 August 2013; the currency has risen 2% in the past week.
While market indices have risen, so has volatility. NSE’s India VIX—a gauge of near-term market volatility—has risen for three straight sessions, jumping 28.4% to 17.7775, implying that there could be rocky times ahead for the market.
“India’s elections will continue to be prime time till May 16 results; expectations are up and so are markets. But it’s still tough in the economy. Private sector leverage is up, asset quality is down and there is banking system risk. Extent of stress and challenge of capital will limit any uptick,” Citi economists Rohini Malkani and Anurag Jha wrote in research note dated 10 March.
FII investments in Indian equities, which slowed to a trickle at the start of 2014, have picked up in recent days. After pulling out a net $12.8 million from Indian shares in January, FIIs have pumped in a net of nearly $420 million in February. In March so far, they have already invested $840 million, taking their net investments for the year to date to $1.3 billion.
Foreign inflows into the debt market have been stronger, with FIIs buying $5.8 billion worth of Indian debt so far in 2014, after selling $8.03 billion in 2013.
Sandeep Singal, co-head of institutional equities at Emkay Global Financial Services Ltd, calls the latest stock market performance “a rally of hope”.
Much of that is from the belief that India would have a stable and market-friendly government when the elections are over. Voting starts on 7 April and will be conducted in nine phases; the counting of votes is on 16 May.
Opinion polls give the main opposition Bharatiya Janata Party (BJP) a significant edge over the Indian National Congress, which is the head of the United Progressive Alliance that has ruled India since 2004.
Many brokerages see the return of the BJP-led National Democratic Alliance that governed India between 1999 and 2004 as a plus for the markets.
The deficit was at 0.9% of gross domestic product (GDP), or $4.2 billion, in the three months ended 31 December, down from 6.5% of GDP or $31.9 billion a year ago, data released last week showed.
“The inflows, coupled with the fact that India’s macro-economic data like the current account deficit have changed for the better, have had a positive effect on the rupee,” said Manoj Rane, managing director and head of fixed income and treasury, India, at BNP Paribas SA, adding that large dollar flows from multinational companies on account of share buybacks have added to the rupee’s gains.
On Monday, UK drug maker GlaxoSmithKline Plc said in a notice to the exchange that it had spent Rs.6,400 crore on a buyback plan to raise its holding in its Indian unit to 75%.
Last week, three global brokerages issued positive views on the Indian currency, Bloomberg reported. Goldman Sachs said it expects the rupee to fare better than currencies from Brazil, Turkey and South Africa, while Deutsche Bank and Barclays both said the rupee was their favorite emerging market currency, Bloomberg said in a report on 6 March.
Arvind Narayanan, executive director and head of sales, treasury and markets, India, at DBS Bank Ltd, said the rupee’s rise has been sharp, but he does not expect the currency to appreciate sharply from here on.
“India is better placed than other emerging markets but some problems like slower growth, high fiscal deficit and high inflation still remain. We may just see a renewed bout of dollar buying, from oil companies and for defence-related purchases. I don’t expect the rupee to rise much above 60.50 per dollar,” he said.
The Indian currency has bounced back from an all-time low of 68.85, seen on 28 August, to become the best performer among its emerging market peers, the currencies of Indonesia, Brazil, South Africa and Turkey.
Since 1 September, it has risen 8.50% against the US dollar, much higher than the 1.56% gains in the Brazilian real, the second best performer.
Investor attitudes towards both Indian equities and the rupee have changed, explained BNP Paribas’ Rane. “Brokerages which had set a 16,000 year-end target for the Sensex are now talking about 25,000 and the short-term premium on forward dollar/rupee has also come down,” Rane said.
Harihar Krishnamoorthy, treasurer at FirstRand Bank Ltd, added that inflows into the debt market may prove to be relatively more stable this time as FIIs have been seen investing in longer term corporate debt, as compared to shorter-term treasury bills, which could have led to volatility. “The dollar inflows in the debt market have come mostly in the long term corporate bonds in the three- to five-year tenure after the Reserve Bank of India (RBI) hiked the limit for long term investors a few weeks ago. Going forward I expect the rupee to move in the 60 to 62 band as opposed to 61 to 63 earlier because of continuing inflows, better trade data and lower inflation,” he said.
In February, in a bid to encourage longer-term investments into the debt market, RBI reduced the foreign investment limit in short-term commercial paper from $3.5 billion to $2 billion, but allowed the balance to be used by investors looking to buy longer-term corporate bonds. The limit for FII investments in corporate bonds stands at $51 billion.
Some analysts expect RBI to use the latest rise in the rupee to shore up its foreign exchange reserves, a move that could limit the currency’s gains.
Bloomberg contributed to this story.