The equity markets were brimming with brio again as both the Sensex and Nifty finished at their lifetime highs on buying in select heavyweights such as Reliance Industries and the HDFC twins.
Optimism over the domestic economy, persistent inflows from foreign portfolio investors (FPIs), moderation in inflation coupled with a pause in the rate tightening cycle from the Reserve Bank of India (RBI) have contributed to the indices scaling new peaks. However, the feat has again led to questions on whether investors are also looking at the micro picture.
While the bulls are juicing the positives from macro-economic data: an anticipated 8 per cent GDP growth in the April-June quarter and low-ball retail inflation at 4.25 per cent in May, this narrative glibly glosses over the painful pangs and the pitfalls: poor jobs creation, weak demand, industry chatter about sharp output cutbacks to clear piling inventories.
Market circles, however, point out that the gains are on expectations the domestic economy will stand out among other nations, and this will be reflected in the earnings of companies. They added that the RBI will be on an extended pause and its next action will be a rate cut, which also would be positive for the economy.
The 30-share BSE Sensex climbed 195.45 points or 0.31 per cent to settle at a record high of 63523.15 after advancing 260.61 points or 0.41 per cent to touch an all-time intra-day peak of 63588.31. It was on December 1 last year, that the Sensex had hit its previous intra-day peak of 63583.07.
On the NSE, the NSE Nifty fell short 12 points from its record intra-day high of 18887,60 which was also hit on December 1, 2022. The broader index ended up with gains of 40.15 points or 0.21 per cent to close at a record high of 18856.85.
Records were also created at the broader market with the BSE midcap index touching an historic intra-day high of 28745.47, while the BSE smallcap index hit 32765.32.
“The Indian market has seen a solid rally in the last couple of months, especially in the mid and small-cap space, led by positive FII flows, robust economic growth versus other emerging market countries, strong earnings outlook, the banking sector in better shape, and private capex cycle expectations,’’ Naveen Kulkarni, chief investment officer, Axis Securities PMS said.
“We continue to believe in the long-term growth story of the Indian equity market, supported by the emerging favourable structure, as increasing capex enables banks to improve credit growth. Our base case December 2023 Nifty target is at 20,200 by valuing it at 20 times on December 2024 earnings’’.
However, some experts are now cautioning that expensive valuation in addition to other risks such as poor monsoon so far could limit the gains.
“India’s equity market is driven largely by FPI flows, especially through the passive index flows. The pause in Fed’s rate hike cycle has helped improve global risk appetite, and India has been one of the beneficiaries. Valuations are now somewhat expensive, which may cap further upside in the short term, but the long-term outlook India is still very attractive,” Pratik Gupta, CEO, Kotak Institutional Equities.
Slow on debt
Even as foreign portfolio investors (FPIs) are chasing domestic equities, they have been modest buyers of debt.
They have nearly invested Rs 8,600 crore in bonds so far this calendar year, against Rs 14,870 crore a year ago, according to NSDL data.
This trend has been attributed to the lower spread between US treasury yields and Indian debt. The US Federal Reserve had begun its tightening cycle in March last year and has aggressively hiked interest rates vis-à-vis India.
Consequently, the yield differential between Indian and US bonds had narrowed, resulting in FPIs fleeing from domestic debt last year.
