Markets hit a new high, but will rally last?

Mumbai: Benchmark stock indices closed at new highs on Wednesday on foreign fund inflows, prospects of a stable and business-friendly government emerging from the general election and an upbeat forecast of economic growth by the International Monetary Fund (IMF), although some doubts persist whether the recent market gains are sustainable.

The BSE S&P Sensex closed 1.61%, or 358.89 points, up at 22,702.34 and the National Stock Exchange’s CNX Nifty added 1.51%, or 101.15 points, to end at 6,796.20.

Both indices also surpassed their lifetime highs in intra-day trading.

The Sensex has thus far gained 7.4% since 1 January, backed by $4.5 billion of inflows from foreign institutional investors; much of this, $4.1 billion, has come in since 1 March.

Stocks have run up on anticipation of the Bharatiya Janata Party (BJP) coming to power after the elections conclude on 12 May. On Wednesday, buyers were also responding to IMF’s belief that the Indian economy would rebound this year, enabled by a stronger world economy, improving export competitiveness and investment-friendly policies.

IMF predicted on Tuesday that the Indian economy will expand by 5.4% in 2014-15 and accelerate to a pace of 6.4% the following year, from 4.4% in 2013-14.

“It is evident that investors are buoyant,” said Jayant Manglik, president of retail distribution at Religare Securities Ltd.

Even the bears are smiling. Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd, a man generally known to be contrarian, said India is better placed than other emerging markets because of the improvement it has shown in economic indicators such as the current account deficit.

The country will continue to attract foreign funds as long as the elections do not throw up a fractured mandate, according to Sharma.

Yet, some have begun to sound warnings.

In an 8 April research note, Kotak Securities Ltd struck a note of caution, saying investors are ignoring potential risks to the economy.

“The reward-risk balance is quite unfavourable in general, based on the binary outcome of national elections alone. Other risks such as potential weak monsoons and growth challenges are simply being ignored in the general euphoria,” Kotak Securities analysts wrote in the note, adding that it saw limited upside in most large-cap stocks.

Indeed, in recent days, the likelihood of the El Nino weather phenomenon that could lead to lower monsoon rainfall has increased.

The Kotak note also said that the two major parties—the Congress and BJP—have been silent on their stance on ongoing reforms such as fuel subsidy cuts and the direct benefit transfer scheme, and added that the election manifestos of India’s regional political parties (some of which will be a part of the next government) does not inspire confidence.

In another report, also dated 8 April, Standard Chartered Bank said that in the past, India’s equity markets had reacted strongly to unexpected election outcomes while the currency market reaction has been muted.

“Markets are likely to react positively if a stable government is elected, but might already be partly pricing in a positive outcome based on the opinion polls,” Standard Chartered analysts Anubhuti Sahay and Samiran Chakraborty said in the note.

According to data from Bloomberg, India’s Nifty is the second-best performing emerging market index in Asia with a 11.1% rise in dollar terms for the year to date, after Indonesia’s Jakarta Composite Index, which gained 24.1%; China’s Shanghai Composite Index dropped 2.8%. Brazil’s Bovespa rose 6.8% and Russia’s RTS Index fell 17.4% in the same period.

Rising exports and moderation in gold imports have reduced the current account deficit in Asia’s third-largest economy sharply to $4.2 billion, or 0.9% of gross domestic product (GDP), in the quarter ended December. It rose to a record of $88.2 billion, or 4.8% of GDP, in 2012-13.

In addition to the weather and the elections, analysts are also watching March quarter earnings that will start trickling in soon. A Mint analysis said earlier this week that earnings would continue the trend of a gradual recovery seen over the past few quarters.

While equity markets hit a new high, the Indian rupee ended at 60.14 to the dollar, down 0.02% from its previous close, because of demand for dollars from state-run banks.

The yields on the benchmark 10-year bond fell from its intra-day high of 9.12%—its highest level since 22 November—after banks started buying bonds due to a sharp fall in prices in the last few trading sessions. Bond yields rise as prices fall. The yields closed at 9.048%, compared with Monday’s close of 9.103%.

Indian markets were closed on Tuesday for the Ram Navami festival.

Joel Rebello contributed to this story.