Sensex gains 3.6% on global cues

Sensex gains 3.6% on global cues

Mumbai: Indian stocks surged by about 3.6% on Monday tracking strong global cues to log their biggest intra-day gain in more than five months after a stand-off between anti-corruption campaigners and the government ended over the weekend and the US Federal Reserve chairman said on 26 August that US economic recovery will improve in the second half of the year.

Also See | Sensex Shoots Up 3.6% on Global Cues (PDF)

The Reserve Bank of India’s (RBI) draft guidelines on new banks also fuelled optimism, offsetting a central bank panel recommendation for higher risk weightages for non-banking financial companies’ capital market exposure.

Widespread rains in several parts of the country over the weekend helped ease concerns on spiralling food inflation. Market experts don’t see the rally being sustained unless RBI pauses rate hikes and foreign money comes into Indian equities. Chartists read Monday’s jump as a bear market rally that could reverse in some time.

The benchmark 30-share Sensex rose as much as 613.2 points, the highest since 1 March, to an intra-day high of 16,462.03. The index opened almost 232 points higher than Friday’s close, mirroring built-up optimism over the weekend. It closed the day at 16,416.33, up 567.5 points, or 3.58%.

The broad-based 50-share Nifty of the National Stock Exchange (NSE) gained 171.80 points, or 3.62%, to 4,919.60.

“The Jackson Hole (speech by US Federal Reserve chairman Ben Bernanke) has clarified that they have adequate tools to take care of the problems for now and will take a monetary measure only if required in the future. This improved the overall sentiment about the US economy. At current valuations, there will be more buyers than sellers," said Nilesh Shah, president, strategic initiatives, corporate banking, Axis Bank Ltd.

Navneet Munot, chief investment officer at SBI Mutual Fund, thinks the rally was purely driven by domestic factors and overseas developments had nothing to do with it. “Today’s rally was not because of global reasons. There is no specific trend in global markets and our markets have outperformed their peers," he said. “Domestic positives like the in-principle acceptance of the Bill on anti-corruption definitely contributed to the rally."

On Sunday, anti-corruption campaigner Anna Hazare ended his 12-day fast after an in-principle acceptance of key demands.

“This is a huge positive for the markets. In fact, today there was no volatility. It was a sustained upward movement. Prices do not change because of buying or selling. It is the change in opinion about the country’s state of affairs, its markets, economy and corporate profitability that is driving the markets, said Raamdeo Agrawal, director and co-founder, Motilal Oswal Financial Services Ltd. “We are going through historic times and the overall image of India is uplifted by the movement initiated by Hazare," he said.

Events last week relating to anti-corruption gave an indication that India is a strong democracy and brought back a lot of confidence, said Shah of Axis Bank. “Markets will remain volatile. It is unlikely that we will see this kind of a jump on any given day in the short to medium term," he said. “Now we are fairly convinced that in the US and Europe, we will see slow growth. So money will tend to flow into regions where growth prospects are higher and faster, including India. Over the next 12 months, it is reasonable to say that there would be positive net inflows from FIIs (foreign institutional investors)."

FIIs—which last week turned net sellers for the year so far, having sold stocks worth $199.22 million (around 914.4 crore today)—bought shares worth a net 366.19 crore on Monday. They turned net buyers of Indian stocks after nine sessions. Domestic institutional investors turned net sellers after 18 sessions. They sold stocks worth a net 325.5 crore.

The markets held strong through morning trade, with the rally gathering pace after European markets opened on a firm note and traders caught on the wrong side rushed to cover short positions.

According to the data available on the NSE website, open interest in Nifty futures for the September expiry was down 1.02 million to 23.2 million, indicating that several open positions were closed. At the same time, Nifty September calls with a strike price of 5,200 added 1.05 million contracts. Though the derivative positions suggest that market participants are expecting the rally to continue, chartists expect this to be short-lived.

“This is a proper bear market rally. A lack of bad news in the US is construed as good news in India," said Vijay L. Bhambwani, a technical analyst. “Markets are opening with upward or downward gaps and only savvy traders who can take overnight positions can make money. On Nifty, 5,075 is to be watched keenly. My target of 4,500 on Nifty still stays."

From a fundamental perspective, investors are eagerly awaiting RBI’s stance on interest rates. The central bank is meeting on 16 September to decide policy rates and one more round of rate increases is expected. “If there is a hike, the markets will be rangebound. But if there is any surprise by RBI, the markets will be rocketing like never before. If inflation comes down to 5-6% by the fourth quarter, we are bound to see a huge rally," said Agrawal of Motilal Oswal. RBI recently said that its priority was to contain inflation, 9.22% in July, even at the cost of growth.

Market breadth was strongly positive with 2,121 shares on BSE gaining against 716 declines. Information technology stocks led the rally, with the BSE IT index rising 5.06%. Tata Consultancy Services Ltd, which rose 7.32% to 1,018.60, was the biggest gainer on the Sensex.

Graphic by Ahmed Raza Khan/Mint