Indian equities have surged over 2.6 per cent to touch new highs in the last two trading sessions, after the BJP’s win in three of the four Assembly elections boosted markets’ sentiments. The decisive results for the BJP in these states have raised optimism among the investor community that the national party will be re-elected at the Centre in the 2024 Lok Sabha elections, resulting in policy continuity and long-term growth.
The current rise in benchmark indices comes at a time when the domestic market is already witnessing a rally due to the stronger-than-expected gross domestic product (GDP) growth in the July-September quarter, fall in crude oil prices, ease in the US bond yields, higher FPI inflows and hopes of an early rate cut by the US Federal Reserve.
The Sensex and Nifty have jumped by around 9 per cent to scale new peaks since the beginning of November.
The Sensex, Nifty surge
In the last two trading sessions, while the Sensex has gained over 1,800 points, the NSE’s Nifty 50 surged by 587.2 points. On Tuesday, the Sensex and Nifty closed at record highs of 69,296.14 and 20,855.1, respectively.
On Monday, Sensex and Nifty recorded the single-biggest day gain in more than a year (since October 4, 2022). The rally in equities resulted in the market capitalisation of the BSE-listed companies touching a record high of Rs 346.46 lakh crore and that of NSE firms to 343.47 lakh crore.
Since November 1, the BSE’s 30-share Sensex has gained 5,705 points, or 8.97 per cent, and the Nifty 50 has jumped by 1865.95 points, or 9.82 per cent.
The political reasons
The decisive majorities won by the BJP in the three heartland states of Madhya Pradesh, Rajasthan and Chhattisgarh have increased hopes of the market that the party will retain power in the 2024 General Elections. The confidence in political stability at the Centre has resulted in heavy buying by investors in markets.
Aditya Birla Sun Life AMC’s Managing Director & CEO A Balasubramanian said India’s equity market has given a clear thumbs up to the state election outcome.
The government’s initiatives such as building strong infrastructure, digital India and ‘Make in India’ are some of the pro-growth initiatives that have been well received by the market.
“The equity market looks at how money is being spent effectively and the sustainability by way of policy-making. The market reaction is a clear endorsement of growth and not driven by freebies,” Balasubramanian said.
The valuation picture does not look concerning as long as the cost of capital does not rise, the interest rate trend remains the same and there is no doubt on the growth outlook of India, he added.
According to Deutsche Bank’s chief economist (India & South Asia), Kaushik Das, the state elections results suggest that the BJP is likely to gain a majority in the Lok Sabha once again. “Our forecasts build in political stability over the short to medium term, which is positive for the ongoing reforms agenda and the structural outlook of the Indian economy,” Das said.
Economic reasons
Higher-than-expected GDP growth of 7.6 per cent in Q2 of FY ’24 has also boosted investors’ sentiments. The second quarter GDP estimate is much higher than the Reserve Bank of India’s (RBI) forecast of 6.5 per cent.
“Our forecasts show that the Indian economy will double in size to USD 7trn by the end of this decade with per capita income also nearly doubling to USD 4,500 by 2030. And even before the end of this decade, India is likely to become the third largest economy by size after the USA and China, overtaking Japan and Germany,” Das said.
The yield on the 10-year US Treasury has fallen from 5 per cent in October to 4.23 per cent at present. This fall means foreign flows will look at the markets, including India, where returns are higher. In India, the benchmark 10-year government security (g-sec) is offering a yield of around 7.20-7.25 per cent. Foreign institutional investors, who sold domestic equities in September and October, have become purchasers of shares in November as well as in December.
The crude oil price was hovering around $84 per barrel in November, and has fallen to $78 a barrel at present. As crude oil prices have fallen, investors expect inflation in the US to remain under control, which further indicates that the US Federal Reserve may start cutting interest rates sooner-than-expected.
Many analysts are expecting a rate cut by the US Fed in the first half of 2024.
FPI investments in domestic equities
After selling Indian shares in September and October, FPIs turned purchasers of local shares in November and December. On Monday, FPI’s net bought Rs 2,073.21 crore of local shares on a net basis, the BSE’s data showed.
So far in December, FPIs bought Rs 15,462 crore of shares compared with Rs 9,001 crore purchased in November, the National Securities Depository Ltd (NSDL) data showed.
“FPIs have reversed their selling strategy in India. The decline in US bond yields and the resilience of the Indian market have forced the FPIs to halt their selling,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Other major indices
While the Sensex and Nifty have jumped 9 and 9.8 per cent respectively since November 1, the markets have also witnessed a broader participation with Nifty mid cap and small cap too rising by 13.8 per cent and 14.3 per cent respectively.
During the same period, the global crude oil prices softened by over 7 per cent.
The Bank Nifty has gained by 10.09 per cent in the last one month. It closed at a record high of 47,012.25 on Tuesday.
Read More: Sensex, Nifty soar: Political, other factors driving the rally | Explained News