Fireworks before Diwali

Fireworks before Diwali

Mumbai: Coal India Ltd (CIL) surged 40% on its debut on Thursday, pushing benchmark indices to new closing highs.

The US Federal Reserve’s announcement that $600 billion (Rs 26.5 trillion) will be injected into its economy in phases under the second quantitative easing programme (QE2) contributed to the euphoria, and fund managers and analysts said continued capital inflows into the world’s third fastest growing major economy will push stock indices to break more records.

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The downside is that inflationary pressures could lead to a bubble-like situation, some of them warned.

At close of trading on the eve of Diwali, when the traditional Hindu year Samvat starts, the Sensex gained 2.09%, or 427.83 points, to close at 20,893.57. The previous closing high of this widely followed gauge was 20,873.33 in January 2008.

The 50-stock Nifty of the National Stock Exchange rose 1.97% to end at 6,281.80 points.

A combination of factors, including the oft-quoted India growth story, the anticipation of quantitative easing in the US which led to record foreign institutional investor inflows, and higher yields in emerging markets have boosted local equity prices in the past two months.

The strong performance of Reliance Industries Ltd (RIL), the largest constituent of the Sensex, which has gained some 20% since September, also played a part in this surge, while a better-than-expected debut of CIL after its recent record initial public offering acted as a trigger for the new closing high, analysts said.

The much-hyped new share sale, which was subscribed 15 times, listed at 287.75—a 17.45% premium over its offer price. Strong investor demand boosted it to 300 within a minute after markets opened and the scrip closed at 342.35.

This is the strongest performance by a state-owned stock on debut after Power Grid Corp. of India Ltd (PGCIL), which returned 93.56%. CIL now is the world’s second most valuable coal miner after China Shenhua Energy Co. Ltd, a unit of the nation’s largest coal producer, according toBloomberg.

It is India’s fourth biggest firm in terms of market capitalization after RIL, Oil and Natural Gas Corp. Ltd (ONGC) and State Bank of India.

CIL’s performance is expected not only to bring back retail investors to the market, but is also a shot in the arm for the government’s disinvestment programme. This class of investors have shied away from the markets after burning their fingers in the 2008 crisis.

“The (CIL) deal sets a strong and positive benchmark," said Saurabh Sonthalia, head of global capital markets at DSP Merrill Lynch Ltd.

“If India is growing, you will see these records getting broken as IPOs get bigger and bigger," said Vallabh Bhansali, chairman of Enam Securities Pvt. Ltd.

Indian companies have announced 121 IPOs in 2010, four times the number a year earlier, according to Bloomberg. First-time share sellers in the country this year, excluding CIL, gained an average 12% on listing, data shows.

Seeking to contain the fiscal deficit to 5.5% of the gross domestic product this fiscal, the government has targeted raising 40,000 crore from the capital markets by selling stakes in public sector companies. So far, it has raised about 17,000 crore and has lined up stake sales in seven more public sector firms, including Steel Authority of India Ltd, Indian Oil Corp. Ltd and ONGC in the next five months.

A follow-on offer in PGCIL is due to start on 9 November.

One reason why recent share sales have performed well, apart from pricing designed to attract investors, is the record inflow from foreign institutions. They have purchased Indian stocks worth some $12 billion in September and October alone out of the record $26 billion that’s been pumped into the market in 2010.

The quantitative easing by the US Fed, which is going to buy $600 billion worth of bonds by June to boost spending and employment in that nation’s fragile economy, is expected to lead to more inflows into countries such as India and Brazil, where investors are chasing higher returns.

Stocks in other markets also reacted positively to the move. Japan’s Nikkei index gained 2.17%, while China’s Shanghai Composite gained 1.85%. Rising Asian stocks pushed the MSCI Asia Pacific Index to its highest in more than two years.

“India’s internal consumption story will help the markets sustain their all-time high levels for some time...(helped by) liquidity," said Anish Jhaveri, group chief executive of Antique Stock Broking Ltd.

India’s economic output is forecast to rise 8.5% this fiscal by the central bank, the consensus forecast for company earnings growth is 20%, while the industrial output gauge increased 15.2% in September: all factors cited by fund managers and analysts to justify the meteoric 14.66% rise of the Sensex in the past two months.

“Certain recent developments have been positive: the monsoon season has been relatively good; India’s fiscal deficit is likely to come in under target; the government has shown an ability to take difficult decisions, such as the de-control of petrol prices; and, a large proportion of large-cap Indian firms will report financials under IFRS (International Financial Reporting Standards)," Suresh A. Mahadevan, head of research at UBS Securities India Pvt. Ltd, wrote in a 26 October note.

But the quantitative easing might not be all that positive as it will lead to inflation of both asset and input prices, especially commodities such as oil, analysts said.

“We are halfway into a bubble," said Manish Chokhani, executive director at Enam Securities. “All that extra liquidity amounts to about 1-2% of money worldwide and it will go into emerging markets and commodities."

Indeed, Indian bond investors fear that Fed’s move will fuel further inflationary pressures locally. The price of the most traded 12-year benchmark bond dropped and yield rose 3 basis points to 8.02% as investors feared that these funds could stoke inflation in India. One basis point is one-hundredth of a percentage point.

The rupee moved to a two-week high against the dollar, gaining 0.5% to 44.21.

Bloomberg, Anirudh Laskar and Ashwin Ramarathinam contributed to this story.