Graphic: Yogesh Kumar / Mint

Graphic: Yogesh Kumar / Mint

Sensex, rupee at new highs on global recovery cues, FDI nod

Sensex, rupee at new highs on global recovery cues, FDI nod

Mumbai: India’s bellwether stock index rose to a two-year high, with investors—domestic and foreign—convinced that the Indian economy will expand rapidly this year.

Monday’s rise of the index was also prompted by similar movements by global indices last week, and Monday’s approval, by the government of several foreign investment proposals.

Graphic: Yogesh Kumar / Mint

Meanwhile, the rupee too rose—to its strongest level since September 2008.

The Bombay Stock Exchange’s Sensex rose 0.38%, or 66.59 points, to close at 17,711.35, its highest close since 29 Februay 2008. The broader 50-stock Nifty index rose 0.39% to 5,302.85.

“The Indian economy is looking favourable against a backdrop of increasing comfort that the global economy is beginning to recover," said Deepak Lalwani, director of India Investments at London-based stock brokers Astaire and Partners Ltd. “A 20-25% increase for the Sensex this year is on the cards."

Last week, the US Dow Jones Industrial Average flirted with 11,000, its highest level in 18 months. Japan’s Nikkei index hit a 18-month intraday high on Friday.

Mostly, these rallies have been driven by good economic news, which reinforce hope that the global economy is recovering. The last US unemployment report beat Street estimates and sent stocks soaring. To be sure, Spain, Greece and a couple of other European nations face a debt crisis, but these seem well under control for the time being.

On Monday, US stocks opened in the green. The Dow Jones Industrial Average was trading at 10,895.70, up 0.42% at 8.30pm, India time.

There has been similar positive news flow about India, one of the only two $1 trillion (Rs45 trillion)-plus economies targeting a double-digit growth rate. Last week, rating agency Standard and Poor’s raised India’s credit rating outlook from negative to stable. And on Monday, the government okayed 23 foreign direct investment (FDI) proposals worth Rs2,325 crore.

Foreign investors have invested some $3.95 billion in Indian stocks in the first three months of this year on top of the $17 billion they did in 2009. This helped push the rupee 0.59% up on Monday to a high of 44.97.

Meanwhile, expectations that Indian firms will do well could fuel a further rise in the stock market. “We are seeing a good visibility of earnings growth," said Gopal Agarwal, head of equity at Mirae Asset Global Investments (India) Pvt. Ltd. “We are expecting another 20-22% growth in earnings this year and another round of earnings upgrades."

An earnings report released by local brokerage Angel Broking Ltd on Monday supports Agarwal’s figures.

“Signs of economic improvement are getting stronger in India, with the IIP (Index of Industrial Production, a measure of factory output) growth having recovered from lows of -0.2% in December 2008 to hit a high of 16.7% in January 2010," the report said. The brokerage has upgraded its earnings estimate for companies in businesses such as metals and infrastructure.

“Overall, we expect the benchmark Sensex companies to register 27% CAGR (compounded annual growth rate) in earnings over the next two years," the report added.

However, not all fund managers agree with a bullish assessment of the situation. Andrew Holland, chief executive (equities) at Ambit Holdings Pvt. Ltd, a Mumbai-based investment management and brokerage firm, is still sticking with his broad target of 15,000-19,000 for the Sensex this year. “From April onwards, we might get a correction," he said. “There’s money sloshing around in the system now, but this easy monetary policy is not sustainable."

India’s central bank raised key policy rates by 0.25% on 19 March and some analysts expect it to do so again when it reviews the monetary policy in April. The government has been working to control inflation, which was at nearly 10% in February.

Ashwin Ramarathinam contributed to this story.