Prime Minister Modi’s thumping electoral success over the long weekend has lifted the Nifty to its all-time high, settling the index at the never-before-seen 9,087. The Sensex rose by a similar 1.7 per cent, settling at 29,442.63, with the psychologically key 30,000-level well within sight.
The 30-share BSE index Sensex ended higher by 496.40 points or 1.71 per cent at 29,442.63 and the 50-share NSE index Nifty closed up by 152.45 points or 1.71 per cent at 9,087.
Foreign investors pumped in ₹4,087 crore net into equities on Tuesday, while domestic institutions took the opportunity to cash out, selling net equity worth ₹1,519.94 crore. Retail investors on the BSE did the same, selling net equity worth ₹251.83 crore.
Jayant Manglik, President, Retail Distribution, Religare Securities, said in a note that the jubilation in the markets was mainly in reaction to the BJP’s historic win in State elections, especially in Uttar Pradesh.
“This will further strengthen the (Union Government’s) reform agenda. Also, the IIP data came at 2.7 per cent for January, adding to the positivity,” he wrote. “It’s an eventful week ahead and the markets will now be eyeing the US Fed’s stance on key rates. The majority (of market participants) feels that they’ll go ahead with the rate hike but with no clear signal on quantum. We suggest keeping a bullish tone but with a word of caution: consider the possible volatility ahead.”
Among BSE sectoral indices, capital goods index was the star-performer and was up 3.06 per cent, followed by realty 2.57 per cent, consumer durables 2.4 per cent and banking 1.93 per cent.
Major Sensex gainers were ICICI Bank (+5.99%), HUL (+4.54%), L&T (+4.4%), HDFC (+3.69%) and Sun Pharma (+3.61%), while the major losers were Bharti Airtel (-0.95%), Axis Bank (-0.88%), Coal India (-0.76%), GAIL (-0.59%) and Bajaj Auto (-0.2%).
Rupee surges
In the currency market, the rupee, too, was on fire. Robust dollar inflows on account of foreign portfolio investments in the equity market saw the rupee strengthen to a 14-month high on Tuesday.
It closed 78 paise stronger at 65.82 to the dollar as against the previous close of 66.59. The domestic unit saw a gap-up, opening at 66.18.
Intraday, the Indian unit appreciated to 65.76 to the dollar. Due to the sharp appreciation in the rupee, exporters panicked and started selling dollars.
However, the Reserve Bank of India was believed to have intervened (by buying dollars) in the market at various levels in a bid to prevent volatility in the forex market.
Economic reform agenda
Domestic sentiment was buoyed as investors saw Prime Minister Narendra Modi's landslide victory in Uttar Pradesh as endorsing his economic reform agenda.
This stunning victory has once again reiterated the role of the unbeatable combination of Prime Minister Narendra Modi and party president Amit Shah.
BJP’s decisive victory in Uttar Pradesh and Uttarkhand Assembly polls will empower the saffron party in the selection of the next presidential candidate when Pranab Mukherjee retires in July.
Also, better than expected industrial output numbers boosted the domestic sentiment. IIP (index of industrial production) in January bounced back by expanding 2.7 per cent year-on-year.
Boost to economic policy reforms
Foreign and domestic investors, who have been supporting the market rally, will interpret the win as an indication that economic policy reforms will get an impetus.
The likelihood that the BJP is a strong contender in the 2019 Lok Sabha elections will also be taken positively by foreign investors, who prefer continuation and stability in policy-making.
Equity markets have also been enthused by macro data and company earnings in recent months that showed that demonetisation had a negligible impact on the formal sector.
Also, global events such as the US Federal Reserve’s next move on interest rates and crude oil prices could play a larger role in determining stock market movements.
'Huge confidence boost for reform'
Analysts now expect Modi will be emboldened to embark on more reforms including reforming the retail sector, easing labour laws, and cleaning up bad debt at banks.
But any further gains will be tempered by concerns about valuations as well as global risks, including how much the US Federal Reserve will raise US interest rates this year.
“The results ensure sustainability of government policies for the next two years without much political noise,” said Ashish Vaidya, executive director and head of trading at DBS Bank in Mumbai.
“However, all financial markets will be driven by global factors. We have to also wait and see when domestic private investment picks up as on-the-ground growth hasn't really improved much.”
Modi has long held strong appeal for investors after winning overwhelmingly in 2014 by pledging ambitious economic reforms.
The prime minister has already delivered on some measures, including unveiling a national goods and services tax that will be rolled out this year.
But investors will seek more action, especially in reviving private investments and easing the cost of doing business.
Sentiment is also likely to be tempered given the central bank is expected to hold interest rates this year due to concerns about inflation.
Shares were already trading at a price-to-earnings ratio of 19.85 over the next 12 months, compared with their five-year historic average of 17.8.