FPIs, Fed move raise market to new highs

Mumbai: Indian markets scored new records on Friday as the country’s blistering growth amid global adversities continued to draw dollars seeking a new home, at a time interest rates look set to cool in the world’s largest economy.

Driven by a surge in the shares of IT and financial services companies, the Nifty 50 and the BSE Sensex lifted off for a second straight session, touching new highs of 21,492.3 points and 71,605.76 points during the day. The Nifty 50 closed 1.3% higher at 21,456.65, while the BSE Sensex ended 1.4% higher at 71,483.75, the highest close yet for both indices.

The US Federal Reserve’s indication of three likely interest rate cuts in 2024 brightened the market mood, aided by broader investor participation, ample liquidity, corporate fund-raising activities, higher public capital expenditure and hopes of political stability.

“I expect a front-loading of interest rate cuts by the US Federal Reserve, with one in the first quarter of 2024. IT is going to be a main beneficiary of that, followed by banking where we will see cuts in deposit rates ahead of those in lending rates, which will boost net interest margins,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies.

A JP Morgan research note dated 8 December said that investors have been pulling money out of Chinese markets on prevailing geopolitical tensions, redirecting them to other markets like Japan, India, Europe, and US which are perceived to gain from the developments in China.

Many believe India stands out among emerging markets, as it is expected to keep growing at a robust pace. “India’s weightage in the MSCI EM Index has doubled in the last eight years, from approximately 7% in 2015 to approximately 15% now. In fact, ex-China India’s weightage in MSCI EM Index is approximately 22%,” said Tridib Pathak, executive director and portfolio manager, Avendus Olivo PMS. Falling treasury yields in the US have driven out money seeking higher returns, which has flooded into higher-yielding assets in emerging markets, including India. Foreign portfolio investors (FPIs), who had sold a net ₹18,174.67 crore and ₹22,112.95 crore of shares in September and October, made net purchases of ₹19,177.86 crore in November and ₹32,989.33 crore in December, fuelling the rise.

For FPIs, a weaker US dollar implies more Indian rupees for each dollar invested.

This currency advantage can make Indian assets more attractive, potentially leading to greater inflows. Expectations of lower rates in the US also make countries with comparatively higher interest rates like India more attractive for FPIs.

So far in 2023, the Nifty 50 and the Sensex have rallied 17.91% and 16.87% respectively, against 12.41%, 28.2% and 0.53% in Dow Jones, Nikkei 225 and FTSE 100 respectively.

The Shanghai Composite and Hang Seng indices fell 5.58% and 16.64% during this period.

Besides India’s structural promise, short-term factors that could push the markets even higher include robust economic activity, strong corporate earnings, declining oil prices, substantial domestic inflows, and continued traction from foreign investors, supporting elevated valuations and keeping volatility low. But some market experts said corrections are likely.

According to Deepak Jasani, head of retail research, HDFC Securities, the market is yet to see its peak.

Though valuations aren’t cheap, Jasani said these are still justified as no other economy provides growth prospects as India does. However, he pointed out that intermittent corrections are likely, and long overdue.

Marquee investor Ramesh Damani said, “If you ask me whether the market could fall, I’d say volatility is normal, but is there a risk of a collapse—I’d say no”.