International Monetary Fund (IMF) chief Christine Lagarde’s comments on the weekend that the Indian economy was on a “very solid track" also boosted investor confidence ahead of Diwali on 19 October.
The BSE’s 30-share benchmark Sensex closed at 32,633.64 points, up 0.6% from its previous close. The 50-share National Stock Exchange’s bellwether Nifty also gained 0.6%, closing at 10,230.85. Across Asia, equity markets were strong on Monday with Japan’s Nikkei extending gains to touch a fresh 21-year high.
Data released in recent days has been encouraging after the disappointment of gross domestic product growth decelerating to 5.7% in the June quarter, the slowest pace in three years.
“Post-dismal first-quarter GDP data, other macro indicators have been comforting, which has added to the positive sentiment driving the markets," said Vinod Karki, vice-president (strategy) at ICICI Securities Ltd. “Globally, equities are also rising, which indicates that risk appetite of investors is growing."
Industrial production grew 4.3% in August, the fastest pace in nine months, a fact analysts attributed to restocking after the 1 July implementation of the goods and services tax and the onset of the festive season. Retail inflation was unchanged at 3.28% in September.
On Friday, the government said merchandise exports grew 25.7%, the fastest pace in six months, to $28.6 billion in September, helping cut the trade deficit to a seven-month low of $8.9 billion. Data released on Monday showed that wholesale inflation rose 2.6% in September from a year ago, slower than the provisional 3.24% recorded in August.
India also received a vote of confidence from IMF chief Lagarde. “We believe that India is for the medium and long term on a growth track that is much more solid as a result of the structural reforms that have been conducted in India in the last couple of years," Lagarde said on Saturday.
That has given, at least domestic investors, reason to continue ignoring high valuations and keep buying. Local mutual funds and insurance firms have bought Rs68,882 crore worth of Indian stocks so far this financial year; foreign institutional investors have pulled out a net $1.85 billion.
Subdued corporate earnings growth has been a cause of worry, especially given high valuations, and may very well have been the key factor behind the outflow of foreign investor money in recent months, analysts said.
The Sensex and Nifty trade at 18 times one-year ahead estimated earnings compared with 12.67 times for the MSCI Emerging Markets Index.
“Major concern of markets is the current valuation which is elevated at the moment. Earnings are expected to see a recovery only in fourth quarter," said Atul Bhole, vice president, investments, at DSP BlackRock Investment Managers.
There are also rising concerns that the foreign money leaving India may well turn out to be a full-blown rout as markets catch up with the US Federal Reserve’s plan to reduce its balance sheet size.
“Fed increasing its interest rates and trimming its balance-sheet starting this month may pressurize FII (foreign institutional investor) flow of money into India. At the moment, domestic liquidity is robust but may not be able to sustain if FII outflow increase," added ICICI Securities’ Karki.
The Federal Reserve has forecast one final rate hike in 2017 as well as three more in 2018 and is preparing to start unwinding its massive $4.6 trillion balance sheet.
Analysts caution against a sense of complacence. “The tone of the annual meetings of the IMF and World Bank in Washington, DC, which concluded yesterday, was characterized by comfort about the ongoing global synchronized growth pick-up against considerable worries about near-term risks of military conflict and protectionism," said Taimur Baig, chief economist, DBS Bank Ltd, in a 16 October report.
PTI contributed to this story.