Indian financial markets made a smart recovery on Tuesday after the previous day’s bloodbath, with benchmark equity indices vaulting over 2.50 per cent; rupee making its biggest single-day gain of about 50 paise in a year; and Government Securities (G-Secs) yields softening about 5-6 basis points.

That markets shrugged off US Fed Chief Jerome Powell’s hawkish comments over the weekend that “restoring price stability will likely require maintaining a restrictive policy stance for some time…” It is underscored by the fact that foreign portfolio investors (FPIs) reposed their faith in India by buying heavily. Though India can’t decouple with the rest of developed and emerging markets, there is a strong expectation of relative outperformance on the back of improved macros, robust trend in most of the high-frequency indicators, progress and coverage of monsoon, lower commodity prices, improvement in credit growth, an expectation of big festive demand after a long Covid-induced slowdown, and improvement in corporate profitability.

The BSE Sensex and the Nifty surged 2.70 per cent and 2.58 per cent, respectively, logging their best single-day gain since May 20. According to analysts, news that India is expected to enter JPMorgan Bond index soon triggered a positive rub-off on equities, too. Stock markets across Europe, and US futures were also trading higher during mid-session.

According to maketmen, the fall in global and domestic markets in the last two days was mainly a knee-jerk reaction to Powell’s speech, as the market has already discounted a 75 basis points rate hike. Besides, India is expected to post a strong Q1 GDP number on August 31, adding to the positive sentiment in the market.

Tuesday’s rally was mainly account of FPIs buying. According to exchange data, they were net buyers to the tune of ₹4,165.86 crore even as domestic institutions offloaded ₹956.72 crore worth shares. “This powerful rally can be attributed to delivery-based buying by the FIIs and short covering in the F&O market,” said Santhosh Meena, Head of Research, Swastika Investmart

Shift in focus

BofA Securities, in a recent note on Nifty outlook, said: “Potential for fiscal surprise on stronger-than-estimated tax collections, 5G auctions and disinvestment revenues; and potential for continued reforms: power sector reform could potentially be the next large reform. If these factors cumulatively play out, Nifty could be at the higher end of our estimated target band at 19,500.”

All the 30-Sensex components ended in the green, led by Bajaj twins — Bajaj Finserv and Bajaj Finance that rallied 5.47 per cent 4.86 per cent, respectively. The BSE Midcap jumped 1.97 per cent and Smallcap index climbed 1.40 per cent.

Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd, said: “Strong bounce back in local benchmark indices came on the back of recovery in Asian and European indices. Focus seemed to have shifted from hawkish Fed stance to expectations of a strong Q1 GDP numbers. Despite volatility and uncertain global macro environment, the rally shows that India would remain a good long-term bet.”

Rupee gains

Dollar sales by exporters and FPI inflows into the equity markets buoyed the rupee, which saw its biggest single-day appreciation in a year, even as the dollar index weakened a bit. The Indian unit (INR) closed about 51 paise up at 79.45 per dollar (USD) against previous close of 79.9625. Tuesday’s closing level was also the highest closing level in two weeks.

INR last appreciated over 50 paise on August 27, 2021, when it closed at 73.68 per USD, up about 53 paise.

“RBI sold dollars yesterday (Monday) as a defensive strategy to protect the 80 USDINR level. Today (Tuesday), RBI sold dollars as an offensive strategy to push the USDINR below 79.50. Since the rupee could not sustain the 80 per dollar mark on two earlier occasions, exporters sold dollars. Being month-end, exporters converted the dollars they received last month in their Export Earners Foreign Currency account, adding to the dollar supply in the market,” said a chief dealer with a private sector bank.

G-Secs rally

Government securities rallied, with price of the benchmark 10-year GSec rising 42 paise and its yield sliding about 6 basis points as the bond market discounted rate hikes by US Fed as well as RBI and a large corporate bought this paper in large quantities as part of its treasury operations.

Price of the 10-year G-Sec (coupon rate: 6.54 per cent) closed at ₹95.615 (previous close: ₹95.195). Yield of this paper softened to 7.1893 per cent (7.2534 per cent).