The market staged a stellar performance right from the starting of this week.
BSE Sensex (up 1,570 points) and Nifty50 (up 476 points) soared 4 percent each in four consecutive sessions, recouping more than 80 percent of Budget week losses. As a result, the total BSE market capitalisation (investor wealth) increased by nearly Rs 6 lakh crore
The BSE Midcap index climbed over 4.5 percent, while all sectoral indices, barring IT, participated in the run.
Here are 5 key factors that drove the rally during the week:
The Markit Manufacturing and Services PMI remained strong for second consecutive month in January, which indicated that economic growth could have bottomed out in November, experts feel. Even November IIP data announced in January indicated the same.
India's services sector activity surged to a seven-year high in January driven by sharp increase in new business orders, leading to job creation and business optimism amid favourable market conditions, a monthly survey said on February 5. The IHS Markit India Services Business Activity Index rose from 53.3 in December to 55.5 in January, signalling the strongest upturn in output in seven years.
Also manufacturing sector activity climbed to a near eight-year high in January, driven by sharp rise in new business orders amid a rebound in demand conditions that led to rise in production and hiring activity, a monthly survey said on February 3. The IHS Markit India Manufacturing PMI rose from 52.7 in December to 55.3 in January.
India's industrial output, the closest approximation for measuring the economic activity of the country's business landscape, grew 1.8 percent in November against a contraction of 3.8 percent in October.
Manufacturing output, which accounts for more than three-fourths of the entire index, grew 2.7 percent in November, against a contraction of 2.1 percent in October.
"My sense is the improving PMI (Manufacturing at 8-year high and Services PMI) was the big trigger for the market, along with good IIP growth in November, which indicated that GDP growth could have bottomed out in November and there could be some greeshoots," Shailendra Kumar, Director & CIO at Narnolia Financial Advisors told Moneycontrol.
Auto sales remained weak YoY in January due to slowdown in demand and higher base in January 2019, but the month-on-month performance was in double digit which was also one of reasons for rally in the market.
"The growth MoM came on the back of higher discounts offered for clearing the BS-IV stocks and strong recovery in the key export markets," Narnolia said, adding the industry is poised to complete BS-VI transition by the end of February 2020.
Passenger vehicle segment has declined by 4 percent YoY whereas commercial vehicle segment witnessed severe degrowth of 18 percent YoY. The two-wheelers segment has reported a decline of 12 percent YoY while 3-wheelers came as surprise and posted a growth of 11 percent YoY. The tractor segment posted a growth of 3 percent YoY.
Budget and RBI Policy
The Budget failed to meet high expectations considering the slowdown, but was not negative, experts feel.
The market realised that Budget largely focussed on long term than short term, which lifted sentiment. The abolition of dividend distribution tax, change in personal income tax rate slabs along with infrastructure push were key positives, though Budget did not mention LTCG and STT, which was largely expected by the market.
"The Budget could have surprised positively but could not, and also there was no major positive as well as negative in the budget considering lot of measures already announced by the government since August 2019. Also RBI's strong statement saying they will make sure that all things will improve going ahead," Shailendra Kumar reasoned for rally.
Further, on February 6, the RBI also acted and fill up the gap created by budget, announcing liquidity measures for stressed sectors like housing, auto and MSMEs. Also the central bank announced some measures that will ultimately direct banks to lower lending rates. Hence, many analysts called it as a mini budget.
"Budget Part II was delivered by RBI in the form of lowering costs to MSMEs and bringing some life into realty wherein loans to commercial sector will be considered as standard (Projects which are just about to complete but are stuck due to last mile funding gaps). RBI indeed used all its might to force banks to lower interest rates to induce transmission for the benefit of end users, which it has partly achieved," Jimeet Modi, Founder & CEO, Samco Securities told Moneycontrol.
International benchmark Brent crude futures continued to hover around $54-55 a barrel, after falling from around $65 a barrel seen in January, following fears of lower global oil demand amid fast-spreading China's novel coronavirus that has taken lives of more than 550 in world and infected over 28,000 people.
Any fall in oil prices is always a major positive for world's third largest oil importer. India bought 80-85 percent of oil requirement from overseas suppliers.
Global Cues and Novel Coronavirus
Markets across the globe rallied as the fears of China's wide spreading coronavirus abated for the time being, after sharp negative reaction in previous week, but will be closely watched due to rising deaths and infected people.
But the impact of coronavirus on Chinese economy will be big considering the shutdown of several manufacturing plants and offices, which will ultimately stall the growth.
As a result, S&P Global Ratings today revised China’s GDP growth for 2020 downwards to 5 percent from 5.7 percent earlier (before the novel coronavirus outbreak), citing the impact of virus on first quarter of 2020.
US markets hit record highs amid strong earnings and positive economic data. The announcement of cutting tariffs by China on several US products also lifted sentiment.
European as well as Asian peers also reacted positively.
China on Thursday said it would halve additional tariffs levied against 1,717 US goods last year, following the signing of a Phase 1 deal that defused a bruising trade war between the world's two largest economies, reports Reuters.
Most analysts feel the current China's move with respect to tariffs could be to defend itself amid virus outbreak that stalled activity across the country, though it is a part of Phase one trade deal signed in January.
China's finance ministry said in a statement that starting February 14, additional tariffs levied on some goods will be cut to 5 percent from 10 percent and others lowered to 2.5 percent from 5 percent.