Mumbai: Indian stocks rose on Thursday to their highest close in almost 15 months as investors bet on more government measures to attract foreign inflows and lift sagging economic growth. The buying helped boost the rupee to its highest level against the dollar in nearly six months.
The government didn’t disappoint investors. In announcements made after markets closed, the United Progressive Alliance government raised the cap on foreign direct investment (FDI) in insurance ventures to 49% from 26% and opened up the pension sector to overseas investors.
BSE’s benchmark Sensex rose 188.46, or 1%, to 19,058.15 points, its highest close since 7 July last year. The National Stock Exchange’s Nifty index gained 56.35, or 0.98%, to close at 5787.60 points, after briefly breaching the psychologically important 5,800 levels in intra-day trade.
The rupee gained 0.81% from its previous close to end at 51.745 a dollar on the back of a strong equity market and increased foreign fund flows. It touched an intraday high of 51.663 a dollar, a level last seen on 18 April.
Thursday’s announcements by the government followed up on policy changes unveiled last month to allow FDI in multi-brand retail, easier norms for FDI in single-brand retail and overseas airlines to invest in domestic carriers.
Also last month, the government raised the price of diesel and capped the supply of cooking gas to reduce its subsidy burden, demonstrating the will to take hard decisions in the face of resistance from its own partners and opposition parties.
Analysts expect the rupee, which had weakened to a lifetime low of 57.30 per dollar in June, to extend its gains.
From mid-September, the Indian unit has gained 7.09% against the dollar, wiping out its 4.24% loss from the beginning of the year. Since January, the currency is now up 2.55%.
With a 25.16% return since January, the Sensex is one of the top performers among emerging markets indices.
Over the past one month, the Sensex has gained 9.27% and the Nifty is up 9.74%. Market experts attribute the rally to a sudden change in investor sentiment after the government set the ball rolling on policy reforms.
“Not long back, there was a lack of confidence not only among investors, but also among companies and their promoters. Most of it was attributed to policy paralysis. Today, there is significant confidence. Foreign institutional investors (FIIs) are coming in and that should render more steam to this rally,” said C.J. George, chairman and managing director of Geojit BNP Paribas Financial Services Ltd.
FIIs, the key drivers of the Indian stock market, bought stocks worth $182.54 million on Thursday net of selling, provisional data available on the NSE website showed.
In the year so far, they have bought Indian equities worth $16.33 billion net of selling, the most among 10 Asian markets tracked by Bloomberg.
Domestic institutional investors sold stocks worth a net Rs.34,145.8 crore in this period.
“The rupee should strengthen further. A realistic view of disinvestment can be expected starting November and that should bring in more flow to the market. Besides, the government is not yet done with its reforms agenda, which should be rupee positive,” said Harihar Krishnamurthy, treasurer at FirstRand Bank Ltd.
Shares of companies in interest rate-sensitive businesses led the gains with the biggest power equipment maker, Bharat Heavy Electricals Ltd, (up 6.57% at Rs.266.05) topping the Sensex pack. It was followed by ICICI Bank Ltd (up 2.93% at Rs.1,083.70), Dr. Reddy’s Laboratories Ltd (up 2.16% at Rs.1,718) and Maruti Suzuki India Ltd (up 1.97% at Rs.1,391.20).
Shares of financial intermediaries also rose. Reliance Capital Ltd gained 1.96% to close at Rs.452.85. State Bank of India shares were up 2.15% at Rs.2,344.80.
Brokerage stocks rallied on hopes of a revival in trading volumes that would translate into a better financial performance. The market breadth was positive with 1,705 BSE stocks advancing against 1,245 declines while 124 remained unchanged.
Technical analysts said there is more steam left in the market, advising retail investors to focus on quality mid-cap stocks that have been underperformers so far.
“We continue to remain bullish. We expect mid- and small-cap stocks to outperform since those indices are still below their January-February highs, even as the Nifty is above its previous highs. Retail investors should focus on quality mid-caps that have underperformed so far,” said Nooresh Merani, a technical analyst and the chief executive of Analyseindia.com.
Although economic fundamentals are yet to turn around, with industrial output and exports yet to recover and consumer sentiment staying downbeat, some market experts say the markets should be seen as a leading indicator.
“Fundamentals do not justify the rally, but if you wait for everything to fall in place to enter, the markets would have discounted it all and the rally might well be over by then. Historically, markets have been ahead of events,” said George of Geojit BNP Paribas.
Although industrial output has been muted, the Reserve Bank of India has been unable to cut policy rates after a half percentage point reduction in April because of persistently high inflation.
The rise in diesel price may add to inflation, but analysts said more government steps to reduce its fiscal deficit may encourage the central bank to reduce borrowing costs. If indeed that happens, it will likely help extend the stock market rally.