Mumbai: A drop in crude oil prices from their 31-month highs, favourable cues ahead of the earnings season starting on Friday as well as short-covering by investors saw Indian markets rise by over 2% on Wednesday.
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The Bombay Stock Exchange (BSE) sensitive index, or Sensex, India’s equity bellwether, rose 434 points to close at 19,696.
Analysts said it was unlikely that the rally would be sustained as long as oil and commodity prices remain high. While Brent crude oil prices have corrected by $5 (Rs 222.50) per barrel since Monday, they are still trading at $121.
The drop in oil prices, however, boosted investor sentiment across Asia, with most markets gaining ground. Analysts had earlier expressed fears that high prices could lead to demand destruction and hurt growth.
Oil fell more than $3 on Tuesday as Goldman Sachs Group Inc. warned again of a price reversal and key forecasters said expensive crude could erode demand, Reuters news agency reported.
High prices are beginning to dent oil demand growth, said the International Energy Agency (IEA), an energy policy adviser to Western consuming nations.
Slower economic growth could cause prices to correct, IEA said.
The Organization of the Petroleum Exporting Countries kept the 2011 oil demand forecast steady in its monthly report, but said the group saw a risk that higher prices could reduce that for transport fuel. The drop in oil prices boosted sentiment and led to some short-covering by investors, said Gaurang Shah, head of wealth management at Geojit BNP Paribas Financial Services Ltd.
Short-covering takes place when traders, who have sold shares they do not own in anticipation of lower prices, buy them to close the open position.
“With FII (foreign institutional investment) flows slowing down and concerns over high inflation and commodity prices still remaining high, we do not expect the markets to move up significantly,” said Shah.
Markets were also boosted by positive earnings expectations from information technology (IT) firms and banks. Expectations of better guidance from technology bellwether Infosys Technologies Ltd was one of the main drivers of the rally, said Sanjeev Patni, president, institutional equities, Prabhudas Lilladher Pvt. Ltd.
The IT index, which rose 2.15%, was among the major gainers on Wednesday along with auto and bank stocks. Packaged consumer good heavyweight ITC Ltd, which is expected to post better results compared with peers, scaled its lifetime peak of Rs 190 before closing at Rs 184 on Wednesday.
Overall though, the broader market is unlikely to see major upgrades, analysts said. While sectors such as auto, cement, steel and packaged consumer goods have seen price hikes, it remains to be seen if these were enough to protect margins.
So far, strong growth in consumption demand has allowed companies to realize higher volumes and pass on higher costs.
The consumption goods index went up by over 11%, the February numbers for factory output showed. A moderation in growth, however, might limit the pricing power of firms in the next fiscal.
With oil prices hovering around the $120-mark, many economists have already downgraded India’s growth target for fiscal 2012 to the 7-8.5% range from the 8-9.5% range earlier.
Robert Prior-Wandesforde of Credit Suisse AG, for instance, recently revised his gross domestic product growth target downwards for the second time in six months to 7.5%, while raising the inflation target from 7% to 7.6%, on the assumption that the average Brent crude price would be $115 per barrel in 2011.
The trend in company earnings and movements in commodity prices would be the key determinants of market direction, analysts said.
“It’s unlikely for the markets to rise significantly as long as concerns on inflation, crude prices and monetary tightening remain,” said Patni of Prabhudas Lilladher Pvt. Ltd.