The spillover from the rally in the global markets pushed up Indian equities on Friday. Key Indian benchmarks, after having been range-bound, ended up nearly 2 per cent.
The NSE Nifty closed at 5,342, up 1.9 per cent (103 points). The BSE Sensex closed at 17,683, up 1.9 per cent (337 points).
Mario Draghi, President, European Central Bank (ECB), opened the liquidity floodgates when he announced the launch of an unlimited bond-buying programme to help the struggling Euro Zone economies.
This sent global markets into a tizzy at Friday’s opening. European shares hit a 13-month high. US markets on Thursday had closed up about 2 per cent.
US indicators
Besides the boost from the ECB announcement, US markets rallied on lower unemployment numbers announced on Friday. Market analysts said that the US Federal Reserve was also looking at the possibility of QE3.
Quantitative easing or QE was a measure taken by the Federal Reserve to infuse liquidity into the struggling US economy.
Indian markets followed suit with a gap-up opening of about 1 per cent.
“This led to short-covering in the market at the banking, metals and auto-sector counters as these stocks had been hammered. This lifted the sentiment in the markets and everything went well. However, markets are not expecting this buying to sustain over a long period of time,” said Alex Mathew, Head of Research, Geojit BNP Paribas Financial Services.
In short-covering, traders ‘cover’ their losses by purchasing shares which had earlier been sold under the expectation that they would not gain in the future.
However, market analysts say that while the short-term outlook is optimistic, in the long term, it could stoke inflationary pressures.
“Improved liquidity would lead to higher prices of commodities like crude oil and metals. Liquidity infusion would affect economies like India because we import commodities.
“A $10 increase per barrel of oil leads to a $12-13 billion increase in the current-account deficit. In the long run, this means higher inflation,” said Saravana Kumar, Chief Investment Officer, Tata AIG Life Insurance.
FIIs and DIIs were net buyers for the day at Rs 502 crore and Rs 218 crore respectively. On the BSE, retail investors were net sellers at Rs 55 crore.