Sensex, Nifty scale all-time highs: Will the rally sustain?

FIIs pumped $10 billion into Indian equities in the June quarter.

Indian markets hit a record high on June 28 on the back of sustained strong inflows from foreign institutional investors, while the narrowing current account deficit boosted investor sentiment.

The benchmark Sensex hit a record high of 64,012.16 points, while the Nifty touched an all-time high of 19,003.20 points. At 1.30pm, Sensex was up 0.88 percent or 561 points to 63,977 points and the Nifty gained 0.94 percent or 177 points to 18,994.74.

“After making several attempts in the past few days, the Nifty finally managed to cross its previous highs. Strong institutional flows, healthy macros and robust earnings growth drove the domestic market towards its new highs," said Siddhartha Khemka, Head of Retail Research, Broking and Distribution at MOFSL.

There are several factors that helped sustain the market rally, including some macro fundamentals and some market adjustments. Let's take a look.

Narrowing CAD

India's current account deficit (CAD) fell to just $1.3 billion in the January-March period, helped by cooling oil prices and a booming services sector. India had a services trade surplus of $39.1 billion, which again, was an all-time high. As a percentage of GDP, CAD for January-March 2023 stood at 0.2 percent compared to 2 percent in previous quarter and 1.6 percent in the previous corresponding quarter.

India's external balance has improved rapidly in the second half of 2022-23, forcing economists to make multiple downward revisions to their estimates for the current account deficit. Rahul Bajoria, economics at Barclays expects the current account deficit to fall to $40 billion, or 1.1 percent of the GDP, in FY24 and increase slightly to 1.2 percent of the GDP in FY25. Emkay expects CAD will moderate to 1.4 percent in FY24.

Analysts expect the improvement in current account deficit will sustain, led by incrementally improving trade deficit amid receding commodity prices, especially oil, along with easing domestic and global demand. Additionally, solid albeit moderating services (non-software) trade surplus will continue to partly offset the merchandise trade deficit, they said.

Delay in US recession

Recent data revealed an unexpected strength in various sectors of the US economy, indicating resilience that pushed back the possibility of a recession. According to reports on Tuesday, there was a notable increase in the annual rate of new home purchases, surpassing expectations. Durable goods orders also exceeded estimates, and consumer confidence reached its highest level since the beginning of 2022. Housing prices in the US have experienced a consecutive monthly rise for the third month in a row. These developments depict a positive outlook for the US economy and suggest a delay in any imminent recession.

RBI pause on rate hikes 

The Reserve Bank of India has kept the key policy rates unchanged for the second time in the bi-monthly monetary review of the rate-setting panel on easing inflation. The move by the central bank helped improve the market sentiment.

FII buying binge 

Foreign institutional investors pumped $10 billion into Indian equities in the June quarter - the biggest inflow since December 2020 - on the back of healthy macros and robust earnings growth, analysts said.

Reasonable valuations

Sensex and Nifty one-year forward price earnings currently trade at 19.1x and 18.4x compared to its 10-year average of 18.2x and 17.5x, respectively. Analysts said the current valuations are reasonable.

What everyone wonders is that will the India rally continue. Strong macro data in the US has given room for the US Federal Reserve to resume its rate hike cycle in the next month after a pause. There are growing concern over the progress of monsoon as well in the country with El Niño coming up as a major disruption to weather conditions. Global geopolitical factors, too, are at play.

Analysts, however, sound largely confident about the strength in the rally. According to them, the rally in Indian equities is unlikely to be affected by a potential Fed hike or a deficient monsoon or geopolitical disruptions as the market has already factored them in.

"Superior earnings growth and persistent flows are the main pillars of this rally. We believe as long as these two cylinders are firing, our markets are likely to keep surpassing new highs and generate superior returns for investors who believe and keep faith in India’s growth story," said Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities.