Expected government action on deficits, anticipation of a RBI rate cut and a likely liquidity injection decision from Euro Zone fuelled a rally in the stock indices.
The Nifty and the Sensex rose more than 2.7 per cent with the Nifty closing at 4997, up 134 points (2.75 per cent). The Sensex added 434 points to close at 16,454 (2.71 per cent).
“The overall market was short and when good news came, those with short positions got trapped,” said Mr Gaurav Dua, Head of Research Sharekhan.
“The short-covering that ensued got magnified by a series of positive expectations from the government and Europe.”
FIIs were net buyers, raking in Rs 269 crore worth of equity. Domestic institutional investors were net buyers for Rs 489 crore. Retail investors on the BSE were net sellers, offloading equity worth Rs 75 crore.
“Though sentiment has suddenly turned, it remains to be seen whether all the posturing from the government actually translates into policies that resolve the fiscal and current account deficits,” said the Head of Research of an Indian brokerage.
Though market-men across the globe were expecting a rate cut from the European Central Bank (ECB) it kept its rates unchanged. ECB's long-term refinancing operations rate stands at one per cent.
Mr Mario Draghi, President of the ECB, said in an introductory press statement on Wednesday that Euro Zone's annual real GDP would grow between minus 0.5 per cent and 0.3 per cent in 2012. For 2013, the estimated growth rate was in the 0.0-2 per cent range. Annual inflation for 2012 was forecast between 2.3 per cent and 2.5 per cent. For 2013, inflation is expected to cool off and stay between 1 and 2.2 per cent. Market experts are optimistic of corporate profitability turning around after one year.
“Once asset-turn ratios normalise from the current 0.95 per cent, the profitability of BSE-200 companies will be around 30 per cent higher than current levels and return on equity would rise to 21 per cent,” said Mr Ridham Desai of Morgan Stanley, in his India Strategy Chartbook. “However, this would take more than a year to achieve,” he added.
The gainers
All the indices on the Nifty and the Sensex closed in the green. Volatility was down five per cent and the volatility index, India Vix, closed at 24.90.
Tata Motors, Hero Motocorp, Jindal Steel, R-Infra and Ambuja Cements were the top five Nifty gainers. Cipla, BPCL and Dr. Reddy's were the only stocks that lost value on the Nifty.