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Sensex rises; rally may not last, warn analysts

Sensex rises; rally may not last, warn analysts
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First Published: Wed, Aug 10 2011. 11 15 PM IST
Updated: Wed, Aug 10 2011. 11 15 PM IST
Mumbai: Indian shares snapped a six-day losing streak and ended higher on Wednesday as global stocks rallied after the US Federal Reserve said it will continue to keep near-zero interest rates for two more years to allay fears of a prolonged recession in the world’s largest economy, but analysts said the rally may not last.
It could end as early as Thursday with the Dow Jones industrial average deep in the red in early trading on Wednesday. It was down 3.32% at 10,860.67 points at 10pm India time.
Indian stocks started Wednesday on a firm note with the bellwether index of the Bombay Stock Exchange, the Sensex, opening 386.6 points higher. It closed at 17,130.51 points, up 272.60 points or 1.62%.
The broad-based 50-share Nifty of the National Stock Exchange gained 88.15 points or 1.74% at 5,161 points.
“The rally was aided by short covering and buying at lower levels,” said Alex Mathews, head of research Geojit BNP Paribas Financial Services Ltd.
“The pressured selling has stopped in the global market. That’s the reason some amount of recovery has happened. We don’t rule out some amount of short covering at the same time,” said Deven Choksey, managing director and chief executive of KR Choksey. “One has to tread carefully in this market and we will have to play on bounces and dips now.”
Foreign institutional investors (FIIs) turned net buyers after six days of continuous selling. They bought stocks worth a net $924.17 million. Domestic institutional investors, too, bought stocks worth Rs 14,312.57 crore net of selling.
“The positive news is that the Federal Reserve has cleared the ambiguity surrounding rates. But that still doesn’t change the picture because the issue of a slowdown still remains. Fed rate has been low for sometime now and extending it for two more years may not help. You may see some more selling,” said Samir Gilani, co-head, equities, MAPE Securities.
Following a sharp fall in global stocks last week over worries of more sovereign defaults in the Euro zone and a rating cut on US bonds, governments across the world have been reassuring investors.
The US central bank said on Tuesday that it will increase liquidity supply to banks to revive a “considerably slower” than expected economic recovery and the European Central Bank agreed to buy Italian and Spanish bonds earlier in the week.
The measures have helped bring down panic across global stock markets. Volatility indices, a measure of risk and fear, have fallen, but the volatility in stock prices may not have ended just yet.
While India VIX, the volatility index of NSE, fell to 28.95 after peaking at 34.88 on Tuesday, that of S&P 500 fell to 35.06 on Tuesday from a level of 48 a day ago. South Korean index Kospi’s volatility fell from 50.11 to 46.89 on Wednesday.
“They will continue to be volatile. After six days of sharp fall, at some point they had to recover. It looks more like a technical bounce back. But sustaining this upward move will need more positive news flow,” said Gaurav Dua, head of research, Sharekhan Ltd. “The markets generally go into a trading change after such volatile sessions.”
“I think the worst is over as far as India is concerned. But recovery will be slow. It will depend more on decision making at the political level,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services Ltd.
Gilani said India was better placed than other countries to survive a possible slowdown in the Europe and the US.
“Not just in terms of domestic consumption, but we have a slight advantage as favourable decisions on foreign direct investments and tax reforms can cushion impact on India,” he said.
“While India does not remain immune to a contagion following the US debt downgrade, as of now we expect the impact on the Indian economy to be limited,” Alexander Treves, head of investment, India at Fidelity International, told Reuters. “Aside from the current short-term volatility, we expect India to do well over the longer term.”
Mint’s Ashiwn Ramarathinam and Reuters contributed to this story.
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First Published: Wed, Aug 10 2011. 11 15 PM IST
More Topics: Markets Update | BSE | NSE | Sensex | Nifty |