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After 66,000 landmark, Sensex rally continues: who is driving up the markets?


Foreign portfolio investors (FPIs) are driving up the stock markets to new peaks on a daily basis, sending investors into a buying euphoria. After renewed interest from FPIs helped the benchmark Sensex surge by around 10 per cent in the first quarter of fiscal 2024, the superfast Sensex has spurted 2.38 per cent, in July so far even as analysts cautioned investors against entering into an overheated market.

Domestic stock markets continued their rally on Monday with BSE Sensex, which closed above the 66,000-level last week, hit a new high of 66,310.96 and the NSE Nifty jumped to 19,641.90, a rise of nearly 0.30 per cent, in early morning trades.

The major driver is the return of FPIs, the buoyancy in the global markets, strong macroeconomic fundamentals and the easing of inflation in India. “The scenario has changed with US consumer inflation declining more-than-expected to 3% giving hopes that the US Fed is near the end of the rate hiking cycle. Consequently, the US 10-year bond yield has sharply dipped from 5.1%to 4.7% and the Dollar Index has crashed by nearly 4% from 103.57 to 99.9. This is positive for emerging markets like India, which are likely to witness more capital flows,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

This resilience of the US economy, which was not anticipated and discounted by the market, is the strongest pillar of support for the global markets now, he said.

The mood in the frontline market is very optimistic looking at the aggressive FPI inflows and settling down of global macro headwinds followed by better than strong domestic micro economic data. The 5-big positive domestic catalysts driving the current upsurge are India’s strong GST collection that crossed Rs 1.60 lakh crore mark in June, better recovery in monsoon in June and normal rains expected in July as well, expected stable interest rate scenario worldwide, the US Q1 GDP reassessment from 1.3% to 2%, and easing of US PCE inflation that offers relief to investors who were worried about further interest rate hikes.

Global markets are supported by resilient economic data, avoiding the possibility of a recession. India’s stock market trend was broad-based, owing to the outperformance from energy, financial, metal, and FMCG sectors. Economic activities are gaining strength with the manufacturing PMI level at 57.8, indicating sustained demand for products, fostering a sense of confidence in the manufacturing prospects.

Why are FPIs back with a bang?

FPIs have pumped Rs 30,660 crore into stocks in July so far, pushing up share valuations. In the April-July period, FPIs pumped in Rs 1.07 lakh crore ($12.5 billion) into equities, according to National Securities Depository Ltd (NSDL) data. They remained consistent buyers, with average daily inflows of over Rs 2,000 crore in July. In June, foreign capital flows into equities were Rs 47,148 crore, the highest since August 2022 when inflows stood at Rs 51,204 crore.

FPIs have been bullish on Indian equities on the expectation that the Reserve Bank of India (RBI) has come to the end of its rate hike cycle. Retail inflation increased marginally to 4.81 per cent in June. “India is the best-performing economy compared to the other economies. The corporate sector also showed a turnaround in the fourth quarter. These are the factors because of which we have seen more FPI interest in India,” said Madan Sabnavis, Chief Economist, Bank of Baroda (BoB) said. Higher fund flows also resulted in a stable rupee during the quarter. The domestic currency moved in a narrow range of 81.68 to 82.90 against the dollar in the April-June period.

The big question is whether investors can trust FPIs to stay back when any negative news hit the market. Any policy change in developed markets like the US can change their perception about Indian markets. “The concern, however, is the rising valuations which are getting stretched. The valuations in China (PE is 9) is hugely attractive now compared to valuations in India (PE is around 20) and, therefore, the ‘Sell China, Buy India’ policy of FPIs cannot continue for long,” Vijayakumar said.

Why are domestic institutions selling?

Unlike FPIs, domestic institutions (DIIs) led by LIC, insurance companies and mutual funds, who were big buyers when the market was down in the second quarter and fourth quarter of FY2022-23, are now sellers on many days. In the last quarter (January-March) of FY 2023, DIIs had bought stocks worth Rs 83,000 crore while FPIs sold stocks worth over Rs 50,000 crore. “Domestic institutions are contrarians. They buy when other big operators like FPIs sell… and sell when FPIs and others buy. They have made good profits through this strategy,” said a fund manager.

LIC, the largest investor in the stock market, normally sells stocks when the market soars to new peaks. “We sell when others buy, and buy when others sell. LIC has been making consistent profit from its market operations in the last several years. LIC is a long-term investor in the markets,” said an official.

“Clearly, DIIs are sitting on a good profit on investments made by them in the last quarter of FY2023. They are not accumulating stocks at high levels. Ideally retail investors should follow the investment strategy being followed by DIIs. Then they won’t make losses,” said a market analyst. There’s a perception in the market that the stock markets are entering into an overbought zone with valuations hitting new highs. If there’s a major correction, DIIs won’t get any major impact while FPIs and retail investors – normally aiming at making a fast buck — who invest at high levels, will suffer losses.

Why should retail investors be cautious?

Retail investors have a tendency to enter the market directly and make aggressive purchases when prices have peaked and valuations are already stretched. “We have seen retail investors losing money in the stock market bubbles in the past. They usually buy when the prices are high and left holding the babies in the subsequent correction and falls,” said an analyst with a brokerage.

Analysts have cautioned that there is no room for exuberance or going overboard with the ongoing market rally. Globally growth is low and there is a possibility of the US economy slowing down in H2 of CY 2023. This can impact India’s exports and thereby India’s growth, too.

“The ongoing rally in the market has made valuations very rich. Nifty is trading at above 20 times estimated FY 24 earnings. This is higher than the historical average. Momentum can take the market higher, but at high valuations risk is high. Some presently unknown negative developments can trigger a sharp correction. So, even while remaining invested in the market, investors have to be cautious,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Domestic institutions are already sellers in the market and pulled out Rs 8,129 crore from the markets in July so far. On the other hand, foreign investors have pumped in Rs 30,660 crore – which is considered as hot money. Foreign players exit the markets faster than they enter, leaving retail investors in the lurch.

What is the outlook on markets?

In July, the market trend will be influenced by auto sales numbers in June, first quarter results, progress of the monsoon and the Fed rate decision and commentary by the month end. The retail inflation for the month of June will also be an indicator about the future course of action by the RBI. As a fund manager put it, the market always fears the unknown, whatever seems to be lurking in the shadows. The RBI will review the monetary policy in August first week at a time when vegetable prices have surged and inflation has shown an uptick.

There are concerns about the rise in domestic food inflation, influenced by higher mandi prices trending above Minimum Support Prices (MSP), and muted Kharif sowing, which led investors to exercise caution. The progression of the monsoon and the trend of Kharif sowing in July will be crucial factors in determining future inflation, said an analyst. Besides, the market seems to be flooded with strong FPI inflows, and with US inflation moderating investors are hoping for a rate hike pause by the Federal Reserve later this month.

If FPI inflows continue at this level, the key indices are likely to scale new peaks in the coming days. That said, the market is likely to witness occasional correction as prices of heavyweights have already shot up. DII selling is emerging as a countervailing force putting brakes on the rally.


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