Sensex, Nifty, mid and smallcaps hit record highs, what is fuelling the rally?

Healthy buying in most sectors pushed domestic equities to record high levels in the intraday trade on August 3.

The Sensex hit its fresh all-time high of 53,887.98, while the Nifty made a fresh peak of 16,146.90 in intraday trade.

In sync with the benchmarks, the BSE midcap and smallcap indices also scaled record highs of 23,443 and 27,232, respectively.

Eventually, Sensex closed with a gain of 873 points, or 1.65 percent at 53,823.36 while the Nifty finished at 16,130.75, up 246 points, or 1.55 percent.

BSE Midcap index closed at 23,374, up 0.19 percent while the smallcap index settled with a gain of 0.23 percent at 27,134.

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What fuelled the rally?

The market seems to be taking comfort from improving macroeconomic numbers.

Goods and service tax (GST) collections for July 2021 rose to Rs 1.16 lakh crore, triggering hopes of a recovery in the economy.

Besides, June data indicates that the key industrial sectors are seeing a gradual recovery in output amid a waning second COVID-19 wave. The combined output of the eight core sector industries rose by 8.9 percent in June, as compared to a year ago.

India's merchandise exports also shot up in July, rising 47.9 percent as compared to July 2020. Exports also rose by 34.06 percent as compared to July 2019, before the pandemic struck.

"Now, the macros are turning very positive with the declining fiscal deficit, rising tax collections, and now the excellent performance in exports, which have shot by 48 percent in July. The PMI at 55.3 indicates a potential sharp turnaround in economic activity. This can embolden the bulls to take Nifty beyond 15,950 early in August unless FIIs turn massive sellers at those levels," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Another factor is the healthy June-quarter numbers of India Inc. Despite lockdowns in Q1FY22, corporate earnings have largely been able to meet market expectations.

"The Q1FY22 earnings season has been in-line, benefitting from the lower base of Q1FY21, as lockdowns in Q1FY22 were localised and less stringent against that of Q1FY21. Nifty profits for the 31 companies that have posted their results have grown 70 percent year-on-year (YoY) against the expected 64 percent YoY growth," said brokerage firm Motilal Oswal Financial Services.

While fundamental factors appear to be improving, technical indicators hint that the Nifty needs to breach the 16,000 level to prolong its upward march.

The overall trading range of Nifty is at 15,600-16,000 at this juncture, said Rohit Singre, Senior Technical Analyst at LKP Securities.

"The Nifty has reached the upper band of its overall range, which hints one can start locking their gains on every rise. If the index manages to give a decisive close above 16,000, then we may see more northward move in the near term. Immediate support for the Nifty is near 15,815-15,750 and resistance is placed at 15,920-16,000," said Singre.

The risks

A record high, the market has two top worries—the lingering COVID-19 pandemic and inflation.

Analysts and experts have been highlighting the risk of the third COVID-19 wave as a vast population of the country is yet to be vaccinated.

India's COVID-19 tally climbed to 3,17,26,507 on August 3, with 30,549 more people testing positive for the disease, according to Union health ministry data. The death toll climbed to 4,25,195 with 422 fresh fatalities, the data updated at 8 am showed.

Even though experts hope that the third wave may not be as devastating as the second wave, it can still disrupt lives and economic activities to a great extent.

Inflation is also a point of worry which may pressurise central banks to look out for ways to taper massive pandemic-era liquidity.

The long-term outlook of the market remains positive but in the short-term, volatility is expected and analysts advise traders to stick to a stock-specific approach.

"The strategy of selecting stocks based on themes is yielding decent results and we expect the same trend to continue citing the buoyancy in the broader market. However, traders should limit their leveraged exposure and prefer hedged positions for overnight trades," said Ajit Mishra, VP-Research, Religare Broking.

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