Mumbai: Foreign investors continued to remain bullish on India with robust foreign inflows driving Indian stocks to a record high on Monday as expectations around a fresh government stimulus gained momentum amid slowing economic growth.

Benchmark indices gained more than 1% on hopes that the Reserve Bank of India may reduce interest rates further to infuse fresh liquidity into the economy over concerns that GDP growth could fall below 5% in the second quarter. Gaining 529.82 points or 1.31%, the Sensex ended at a record high at 40,889.23. The 50-share Nifty index was just 27 points shy of a record closing high. The index rose 1.38% to 12,079 points.

A rally in global stock markets amid optimism about a US-China trade deal improved sentiments among investors in India. Shares in Asia also climbed higher on Monday, as investors reacted to Hong Kong’s district council elections amid months of civil unrest in the city.

Hong Kong’s Hang Seng index led gains among major markets. Stock markets in China, Japan and South Korea were up nearly 1%.

Signs of a cooling in rhetoric between the US and China have contributed to a resumption in foreign flows into India and Monday’s market move was in line with similarly strong sentiment across Asian markets, according to analysts.

“Indian stock markets are rallying on abundant foreign liquidity. Emerging markets are seeing strong foreign inflow in the last few months and India is one of the biggest beneficiaries of it," said Jinesh Gopani, head of equities at Axis Mutual Fund.

Foreign institutional investors (FIIs) inflow into Indian equities rose to an eight-month high in November. They bought Indian equities worth $2.27 billion during the month while they are net buyers of $12.49 billion year-to-date.

In October, they pumped in $2.06 billion after a massive sell-off in July to the middle of September.

“FPI inflows continued to improve in October and the first half of November, aided by improving global liquidity driven by the beginning of quantitative easing of $22 billion per month by the European Central Bank from November and the increase in the US Federal Reserve’s bond buying programme to $60 billion per month," said Vinod Karki, head of strategy at ICICI Securities.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

Mutual funds and insurance companies have been, however, selling Indian equities.

In November, domestic institutional investors sold shares worth 4,752.28 crore, the lowest since March this year.

While the recent cut in corporate tax rates led to better-than-expected profit and limited the pace of earnings downgrades, businesses continued to reel under pressure in the three months ended September. A Mint analysis of 1,462 firms showed net sales in the September quarter were the lowest in at least 27 quarters. Net sales decelerated 2.23% year-on-year, much lower than the 5.15% growth in the preceding three months, according to data provider Capitaline.

There is also widespread expectation that the RBI will cut interest rates in its monetary policy review on 5 December.

“We continue to expect the RBI monetary policy committee (MPC) to cut policy rates by 25 basis points (bps) on 5 December and 15 bps in February with growth slipping on rising real lending rates," Bank of America Merrill Lynch said in a note on 25 November.

According to analysts at Nomura, the Nifty is currently trading at 18.4 times forward earnings based on FY21 earnings.

“It has re-rated by 8% since the announcement of the corporate tax cut. There is a strong lagged correlation between 10-year government bond yields and the forward price to earnings (PE) multiple. After the rally, the scope for further re-rating remains limited as yields have largely stabilized. We expect the market to trade at 17-18 times one-year forward PE multiple," Nomura said in a note on 19 November.

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