Apr 18, 2013, 07.31 PM IST | Source: CNBC-TV18

Bulls ride high on macros: Marathon or just 100 meter dash?

Indian equity benchmarks surged Thursday, led by strengths in shares from the banking, capital goods and auto sectors, with the Sensex closing above the psychological 19000-mark.

Bulls ride high on macros: Marathon or just 100 meter dash?
Moneycontrol Bureau

Indian equity benchmarks surged Thursday, led by strengths in shares from the banking, capital goods and auto sectors, with the Sensex closing above the psychological 19000-mark. (Full market wrap)

Brokers said the narrowing of March trade deficit to a two-year low of USD 10.3 billion helped sustain the positive sentiment created by a decline in gold and crude oil prices.

Falling commodity prices are a big positive for India and this could even prompt many foreign investors to increase their weightage for the country in their portfolio, said Tirthankar Patnaik of Religare Capital in an interview to CNBC-TV18 earlier today.

Also giving a boost to the market was the wholesale price inflation, which cooled to below 6 percent mark in March after a gap of more than three years, backed by softening of prices of primary articles, particularly food items.

The beneficial inflation data is of course pointing towards a sooner rate cut than what was expected last week, says Gopi Suvanam, Founder, InvestWorks.

"Current account deficit (CAD)-wise also there are some improvements because of drop in commodity prices. There could be some positive effects in terms of CAD that we can see over the next couple of months. So these are the two positive things that might be driving the market at the moment," he told CNBC-TV18 in an interview.

But the overall global macro picture shows money is moving away from emerging markets. Therefore, Suvanam says, even though these are positive in terms of economic growth, they may not be really that positive to push markets much higher than what we have seen earlier. “For example, even though Wholesale Price Index (WPI) is decreasing we may not see the similar effect in Consumer Price Index (CPI). Similarly, even though CAD might be improving on a temporary basis, we may not be able to see significant growth in exports leading to a long-term sustainable trade deficit,” he explains.

Currently, Suvanam says he is mildly bullish on the economy but not so particularly bullish on equity markets.

The rupee strengthened on Thursday with the underlying sentiment remaining bullish on the back of growing rate cut hopes from the Reserve Bank of India's upcoming annual monetary policy on May 3.

“There could be some institutional flows into India, which could drive down the rupee to 53. In the long term, I think it can go back even up to 60 levels because fundamentally, we haven’t seen significant improvement in exports or we haven’t seen significant improvement in the manufacturing sector which could drive towards stronger rupee. So I think even though we could touch levels of 53 but a more reasonable outlook would be a bearish scenario on rupee,” Suvanam says.

BANKS BACK IN VOGUE?

Right now, a lot of people are recommending putting more money into the banking space despite the recent gains.

Suvanam says he would stick with some leaner and smaller private banks, which are more proactive in growth and who do not have the baggage of non-performing assets (NPA) and bad loans.

"But I would not definitely put my money on, let us say State Bank of India ( SBI ), which has significant baggage of NPAs and has got huge amount of legacy issues. At the same time, I would not even want to put my money on some of the big private banks as well like ICICI or Axis Bank because they also have issues in terms of cost. But (we like) some of the smaller banks like IndusIndYES Bank or some of the regional banks in South India. So one can look at some of these banks instead of looking at big public sector bank," he told CNBC-TV18.

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