The S&P BSE Sensex gained 10.2% in March, clocking the highest returns for the month in 24 years as foreign institutional investors turned net buyers of Indian equities to the tune of more than $3 billion.
The Indian market has rallied after the government stuck to fiscal prudence during the Union budget for 2016-17, raising expectations of a rate cut by the central bank. Some economists expect the Reserve Bank of India to cut rates by 50 basis points during the policy announcement next week.
There are also hopes of an earnings recovery, with brokerage firms expecting 5-10% growth in FY17 compared to flat earnings in FY16.
Most importantly, there is a “risk on" trade globally. The MSCI Asia ex-Japan and the Emerging Markets indices have rallied around 9% and 10.6%, respectively, so far in the month of March, while MSCI India’s performance is between these two. That suggests the Indian market’s performance is influenced mostly by global factors, as there has been no outperformance. The Sensex, MSCI Asia and MSCI Emerging Markets indices plunged in January this year on concerns of global liquidity drying up and worries over weak growth in emerging economies due to hard landing in China and yuan devaluation, so a bounce was in the offing.
Non-resident portfolio inflows into emerging markets have gathered steam after a long lull. Foreign portfolio inflows have surged to a 21-month high of $36.8 billion in March, according to the Institute of International Finance. A part of these flows would have come to India as well because active funds were 3.7% overweight on India as of January, according to Kotak Institutional Equities Research. Moreover, the dovish attitude of the US Federal Reserve has also worked its magic on the markets.
Will the rally sustain? It depends on two things. First, if the liquidity tap at global central banks remains open, then the Indian markets should continue to rally, irrespective of an earnings recovery. But if liquidity dries up and the Fed raises rates faster than expected (although that is ruled out for now), then the chances are that Indian markets will wobble along with others, although an earnings recovery could mitigate the downside.
Unfortunately, the earnings recovery is expected to be slow. India Ratings and Research in a note dated 31 March has said sluggish corporate Ebitda (earnings before interest, taxes, depreciation and amortization) growth would keep aggregate debt levels for FY17 high, while external risks such as the slump in exports and the slowdown in China will affect the fragile recovery in the credit profile of corporates, limiting any increase in capex.