Investors shrug off inflation worries, drive Nifty to scale 18,000 level

Indian equity market looked past the higher consumer price inflation data for August and surged for the fourth straight session with analysts expecting the rally to continue driven by foreign investors.

The strength in the market has also been aided by strong cues from the US market overnight, which surged ahead of the crucial CPI inflation data due later today.

At the open, the BSE Sensex hit a high of 60,551 points, while the Nifty 50 touched the 18,000 mark for the first time since April. The rupee strengthened 0.54 percent to hit a six week high of 79.12 a dollar, while the  10-year bond yields dropped 4 basis points to hit a near five-month low of 7.087 percent on Tuesday.

Even though many economists flagged that the persistently high retail inflation means more rate hike by the Reserve Bank of India, analysts expect the Indian market’s outperformance to continue given the brisk pace of FII investment, coupled with strong macros, compared with other markets.

Finance Minister Nirmala Sitharaman had early last week said that India's economic growth was a priority for the government, as inflation had come down to a "manageable" level. But the released by her ministry on Monday showed that India's inflation was back on an upswing. Inflation climbed to 7 percent on-year in August from 6.7 percent a month back. That was in line with a Bloomberg forecast, but slightly above the consensus estimate of 6.9 percent. The RBI’s target range is 2-6 percent.

"The ongoing market rally is driven primarily by the sudden reversal of FII strategy: from relentless sellers to relentless buyers. Retail investor support and fundamental support to the market from a strong economy are aiding the rally. Now, this has become a classic momentum-driven market which has the potential to take the indices to record highs soon," said Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Many economists expect the RBI to lift the repo rate by 35 basis points to 5.75 percent at its September 30 review and then by another 25 bps to a terminal level of 6 percent in December.

Analysts said the recent robust data of auto, purchasing managers index, GST numbers and favourable monsoon are encouraging, coupled with the upcoming festive season, falling crude and return of foreign investors. Since the start of August, FIIs bought around $7 billion in Indian equities. "We expect strong economic rebound, normalised commodity prices, inflation within target range and better visibility in the near term," said Mitul Shah, an analyst at Reliance Securities.

The recent RBI data which showed the credit growth of Indian banks was at nine-year high of 15.5 percent on-year for the week ended August 26, also helped improve sentiments among investors. The banking index traded higher for the fourth straight session.

The dropping yield amid falling crude and expectations that it will be included in the JP Morgan index also helped to increase investors confidence. This inclusion expects a potential inflow of $30 billion from the move.

"While the Sensex has managed to cross the 60,000 mark, the Nifty hit 18,000 levels. Sector rotation was visible in the market with interest seen in underperforming sectors like IT and metals. Specialty chemicals were also in focus on news of rising global prices on back of supply constraints from Europe and China. We expect the market to remain firm with the Nifty likely to head towards 18,000-18,200 zones," said Motilal Oswal Securities in a note.