Indian investors must have heaved a sigh of relief when the 30-stock BSE Sensex climbed almost 9 percent in July, its highest monthly gain since August 2021, when the benchmark index advanced 8.8 percent.
The softening of crude oil and commodity prices instilled confidence in policymakers and market participants that inflation is peaking. Helping sentiment was the US Federal Reserve, which did not opt for an aggressive rate hike of more than 75 basis points.
Bond rates in the US have declined quite a bit, because of which foreign institutional investors are once again looking at equity for better returns.
What does this indicate?
However, experts are cautiously optimistic and would like to wait before pronouncing that the market trend has finally changed. They say this could be a short, relief rally and the markets could once again turn volatile.
“The July series has been really good for the bulls, breaking the three series losing streak. And it was important because we never had four consecutive negative series. So, in that sense, there is a positive momentum amid concerns of higher inflation and global recession,” said Raj Vyas, portfolio manager at Teji Mandi.
A smart rally in the global markets and strong Indian corporate results made it a good series for the bulls. The markets are seeing a relief rally after hints by the US Fed chief that slowing the pace of 0.75-percentage-point rate hikes will likely be appropriate ‘at some point.’
“Investors are also betting that weak data, including the Q2 GDP data out of the US, might pressure the Fed to slow the pace of interest rate hikes,” said Deepak Jasani, head of retail research at HDFC Securities.
The US GDP declined for the second straight quarter, raising the possibility of a recession in that country.
Is this a sign of trend changing for good?
According to Manoj Dalmia, founder of Proficient Equities, “The trend is not clear and there can be multiple reasons to this rally like expectations of good earnings of companies due to better revenue, rural demand, decreasing commodity prices, etc., but this cannot be considered a trend change as the index might face some hurdles at higher levels.”
FIIs started buying Indian equities after a sustained selling spree over nine months. They started the August series with 57 percent long exposure in index futures as against 15 percent in July.
“If you see the IT and financial sectors, they have started to do well and that’s where the FIIs had larger exposure and that is where they sold the most. So there is no surprise that FIIs have come and changed their stance from net sellers to net buyers,” said Vyas of Teji Mandi.
“We believe FII flows will remain positive and they will increase their investments due to the earnings growth of Indian companies and their positive outlook,” said Vinit Bolinjkar, head of research at Ventura Securities. Besides, domestic institutional investors have countered FII selling, which is sufficient to arrest any major crash in stock prices.
With expectations that inflation is likely to ease in the coming quarters and commodities prices cooling, India stands to benefit.
“Easing inflationary pressure and gradual economic recovery have improved market sentiment, which is expected to sustain due to increased government spending and better-than-expected earnings by companies in Q1. We believe this recovery in stock prices is expected to sustain,” said Bolinjkar.
Where from here?
Experts said the current scenario favours the equity market, with crude oil prices falling and the dollar index testing resistance near 109.
“We believe the Nifty has made a low, but volatility can increase, so buy on dips near 16,500 to 16,750,” said Ravi Singhal, CEO of GCL Securities. “Yes, if Brent crude remains below $90, FII buying may occur, and if the dollar remains below 77, the market may reach 17,400 to 17,800 in the near term.”
The Nifty currently trades above the 200-day moving average of 17,030, which is a positive factor.
However, “there are some near-term triggers like the Reserve Bank of India policy meeting on August 5, global central bank comments, inflation, and the remainder of the quarterly results, which will be important from the market point of view,” said Vyas.
Vyas said over the medium term the market is out of the consolidation phase and that the breadth of the market looks positive as it has digested all the negative news.
“India remains one of the best emerging markets to invest in on relative terms and the end of the uncertainty about Fed rate hikes will lead to many fence-sitters jumping into the markets and this relief rally may extend some more, albeit with some intermittent corrections,” added Jasani of HDFC Securities.
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