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Sensex, Nifty at lifetime high. What is driving bullish momentum in Indian markets?

Over the past 3 months, both Sensex and Nifty have risen more than 7 pc

People pass by the BSE bull outside BSE Building, as the Sensex goes down, in Mumbai | PTI (File) Representational image | PTI

The euphoria seen in domestic stock markets in recent days continued on Tuesday, with benchmark equity indices touching fresh life highs. The BSE Sensex hit an all-time high of 62,887.4 points and the wider NSE Nifty 50 index touched 18,678.10 in intraday trading.

The Sensex eventually closed at 62,681.84, up 177 points or 0.3 per cent and the Nifty was up 55 points or 0.3 per cent to end the day at 18,618.05.

Over the last three months, both the Sensex and Nifty have risen more than 7 per cent. The gains have come despite the continued global geopolitical uncertainties, sharp interest rate hikes by the US Federal Reserve and other central banks, and several agencies lowering their economic growth forecasts for India in 2023.

Credit ratings agency S&P became the latest to cut its India GDP forecasts on Monday. It lowered India’s GDP growth forecast for the year ending March 2023 by 30 bps (0.30 per cent) to 7 per cent and for 2023-24 financial year by 50 bps to 6 per cent.

So, what’s driving the momentum among equity market investors? While India’s economic growth is expected to slow, it will still be among the fastest-growing major economies and therefore is increasingly looking attractive amid the looming recession in developed markets, point out analysts.

The US Fed raised its benchmark interest rate by 75 bps for four consecutive times. But, with the US consumer inflation easing slightly to 7.7 per cent in October from 8.2 per cent in September, there is a rising expectation that there will be smaller rate hikes going ahead.

“The general sentiment in the market has turned positive after inflation started moderating in the US. While the Fed has maintained hawkish stance, it will not be hiking rates as aggressively as it did in the past,” said Sumit Chanda, founder and CEO of Jarvis Invest.

Domestically too, the Reserve Bank of India could moderate its pace of interest rate hikes.

There are several other factors at play too that are lifting the stock market mood. Foreign institutional investors had been big sellers this year. They were net sellers in eight out of ten months up to October 2022. But, recent data indicates their renewed interest in Indian stocks. In October, foreign portfolio investors were net sellers to the tune of just Rs 8 crore and so far in November, they have bought shares worth Rs 34,959 crore, according to data from NSDL.

The FPI bullishness stems from strong corporate earnings growth among listed entities, apart from pick-up in consumption and robust tax collections. For instance, banks have seen strong growth in credit demand—bank credit growth surged 17.2 per cent in the July-September. This has driven a strong rally in banking stocks this year.

“FPIs continue to be bullish on Indian markets in comparison to the other emerging and developed markets. With the slowing down on hiking of rates, inflation under control and the economy being well incubated, we see no reason for India to not be in the leading position and most preferred choice by the international community, not only for equity, but also other markets in the long term,” said Manoj Purohit, partner and leader – financial services tax, BDO India.

While FPIs have stepped up their purchases, domestic flows have also remained fairly strong, largely on the back of the continued growth in systematic investment plans of retail investors. According to data from Association Mutual Funds of India, SIP contributions in October stood at Rs 13,040.64 crore. Net inflows in equity-oriented and index funds last month stood at over Rs 14,400 crore.

“Nifty at life-time high is a function of multiple factors, such as resilient corporate earnings in the second quarter, robust GST (goods and services tax) numbers (at six months high in October 2022) and retail inflation slowing to a three-month low in October at 6.77 per cent, led by softening food and commodity prices. Globally, the US has also found comfort in its recently released lower-than-expected inflation readings, with growing expectations of a decline in pace of interest rate hikes by Fed, amid already existing growth concerns,” noted Pankaj Pandey, head of research at broker ICICIDirect,

Brent crude oil prices have cooled off in recent times, trading at around $82 a barrel now, compared to over $120 a barrel in the wake of the Russian invasion of Ukraine earlier this year. India imports more than 80 per cent of its oil requirements. So, lower crude prices will augur well in terms of lowering the current account deficit.

Lower commodity prices should also aid corporate profitability further. The recent Diwali festive season saw buoyant demand in several categories. After two years of Covid-19 related slowdown, strong demand is expected to continue in the wedding season. Motilal Oswal analysts expect the Nifty earnings to grow at a compounded annual growth rate of 17 per cent over the next two years.

Looking ahead though, there are some worries creeping over the continued zero-Covid policy and lockdowns in China, which could further hurt the already slowing global economy.

Also, higher valuations is something investors will have to now watch out for.

“The ongoing domestic rally is supported by falling crude and commodity prices uplifting corporate earnings outlook. However, the future medium-term performance is a point of concern due to supreme valuation,” said Vinod Nair, head of research at Geojit Financial Services.

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