Indian equity market resumed its upward march on a strong note after consolidating for two consecutive sessions.
Sensex jumped over 936 points while Nifty reclaimed 14,500 in intraday trade as a fresh wave of buying emerged in all sectors.
Eventually, Sensex closed 834 points, or 1.72 percent, up at 49,398.29 and Nifty rose 240 points, or 1.68 percent, to 14,521.15.
In sync with the benchmark index, BSE Midcap and Smallcap indices jumped 2.31 percent and 1.66 percent, respectively.
Why did the market jump?
The Indian market witnessed sharp gains, mirroring trends in other Asian markets.
Asian stocks rose after data showed China's economy was one of the few to grow in the year 2020.
China's economy grew 2.3 percent in 2020 while the United States, Europe and Japan struggled in the wake of the coronavirus pandemic.
Other than the global cues, sustained capital inflow is also underpinning the Indian market. Experts believe that the market may not see the shift in the trend of capital inflow anytime soon.
"Global liquidity is unlikely to do a reversal anytime soon. Till the time the recovery is on a firmer path in key markets like the US, the withdrawal of liquidity is not going to happen. The inflows are going to remain there but the quantum of inflows may fluctuate," said Pankaj Pandey, Head of Research, ICICI Direct.
The market may see an extended profit-booking after the Budget, he said.
As per data available with NSDL, foreign portfolio investors (FPIs) have pumped in over Rs 13,000 crore in the Indian equities in January so far.
FPIs invested a net Rs 17,437 crore into equities but pulled out Rs 2,593 crore from the debt segment between January 1-18.
This translated into a total net investment of Rs 13,396 crore during the period under review, NSDL data showed.
The strong flows are on account of the positive bias towards emerging markets amid weakness in the dollar index and because of strong third-quarter earnings so far.
The December quarter earnings have been decent so far. Other than the numbers, what is heartening is the fact that the companies see the worst behind.
Decreasing COVID-19 cases and the beginning of vaccine drive are also positive factors.
Besides, investors are betting on quality stocks ahead of Union Budget 2021.
The Budget 2021 is expected to focus on infrastructure, healthcare and manufacturing.
For 2021-22, Finance Minister Nirmala Sitharaman has said that the Budget will see a massive public sector investment and expenditure push, including on infrastructure projects and the health sector.
She has also said that financial considerations will be kept aside. This means that a disciplined approach is unlikely this year.
The markets have factored in a fiscal slippage this year and next financial year, with an expectation that the finance minister, in her budget, will spell out a new fiscal roadmap for the medium-term.
The points to worry about
Overall, the market looks positive for the long-term. However, there are factors that can spoil the party on Dalal Street.
Post Q3 results, if the street realises that the stocks (and the market) are overvalued or have run-up ahead of time, then the market may see a correction.
Budget disappoints in terms of levy of fresh taxes or surcharges, fiscal indiscipline and possibilities of interest rates rising sharply are also the risks for the market.
There are other factors also that can trigger a deep fall in the market such as rising interest rates globally, debt to GDP ratio of countries and institutions at dangerous levels, geopolitical concerns, COVID pandemic not coming under control and a sustained rise of US dollar.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.