Mumbai: India’s key equity indices rose for a third straight session to end at a 19-month high after the government agreed to a legislative vote on allowing foreign direct investment (FDI) in retail, ending a parliamentary logjam, and Goldman Sachs upgraded Indian equities to “overweight”.
Global markets rallied on optimism that US President Barack Obama will reach an agreement with Congress over a new budget. The US index futures and Asian shares also rose.
The benchmark BSE Sensex gained 328.83 points, or 1.75%, to close at 19,170.91, the highest since April 2011. The broader 50-share Nifty of the National Stock Exchange of India Ltd (NSE) rose 97.55 points, or 1.70%, to end at 5,825.
According to market experts, November series derivatives expiry also aided gains on account of short covering.
“The markets touched a new calendar year high during the day. While the volatility associated with the series expiry would have contributed partly to the rise, expectations of resumption of the reforms initiatives helped sentiments. The rupee also appreciated against the US dollar, further helping the markets,” said Dipen Shah, head of research, private client group, Kotak Securities Ltd.
The rupee ended on Thursday at Rs.54.82 per dollar, up from Tuesday’s close of Rs.55.45 after touching an intraday high of Rs.54.77. Wednesday was a market holiday.
Goldman Sachs said it expects India’s gross domestic product (GDP) growth to increase from 5.4% in 2012 to 6.5% in 2013 and to 7.2% in 2014. The investment bank expects the Reserve Bank of India (RBI) to cut policy rates by 50 basis points (bps) in each of 2013, 2014 and 2015. One basis point is one-hundredth of a percentage point.
“Three factors drive our relatively optimistic views: a decline in oil prices in real terms over the next few years, a more favourable external demand outlook and domestic structural reforms which can ease some supply-side constraints,” it said.
The Thomson Reuters/Jefferies CRB Index, a gauge of global commodity prices, touched 296.7 on Wednesday, down 7.55% from a high of 320.9 in mid-September.
Earlier in the week, global rating agency Moody’s Investors Service maintained its stable rating on India citing healthy investments and savings rates.
“Markets have gone up because of short covering on futures and options expiry. There is possibility that FDI in retail will go through. Buying momentum could sustain for a couple of days and then we may see some profit booking,” said Suresh Parmar, AVP-institutional head-equity at KJMC Capital Market Services Ltd.
Shares of firms whose businesses are interest-rate sensitive were among the top gainers on Thursday as investors bet on a rate cut by the central bank when it meets for its next monetary policy review.
BSE Realty index, up 3.38% at 2002.45 points, topped the gainers among sectoral indices. It was followed by BSE Bankex, up 2.76% at 13,750.98 and BSE Auto index, up 2.08% at 10,849.42.
“This rally will sustain if there is rate cut, policy action and investment activity picks up,” said Bhupinder Sethi, head-equities, Tata Asset Management.
Despite the government pushing for a rate cut, persistently high inflation has forced RBI to keep rates unchanged even though growth in Asia’s third largest economy has been slowing. In its October policy, RBI left its key policy rates unchanged but cut the cash reserve ratio, or the portion of deposits that commercial banks need to keep with the central bank to meet the credit demand of companies by 25 bps. Market experts say the rally will continue as funds from foreign institutional investors (FIIs) continue to flow in at a good pace.
“FIIs were net buyers of (Indian stocks) worth Rs.1,000 crore yesterday and Rs.1,500 crore today. A major part of these funds are long-only funds and, thus, markets should continue to move up. Rollovers were good and there has been buying across the board,” said Yogesh Radhke , head of quantitative research, Edelweiss Securities Ltd.
In the calendar year so far, FIIs have bought Indian stocks worth $19.26 billion net of sales. Since mid-September (when the government started pushing through reforms such as FDI in multi-brand retail), they have pumped in a net $6.4 billion. Domestic funds have sold stocks worth a net Rs.46,295 crore in the year so far. Action in the derivatives segment indicates that traders do not expect the markets to correct much from these levels.
“The December series options open interest concentration for Nifty is seen at 6,000 call and 5,500 put options with implied volatility seen at 13. This is the third consecutive series with extremely low implied volatility. We expect a rise in volatility in the current series. Resistance (for Nifty) is at 5,940 and positive bias is expected to continue if the index sustains above that level,” said Sahaj Agarwal, associate vice-president, Kotak Securities.