Explained: Will the positive momentum continue for Indian markets

Experts feel that domestic factors such as rise in vaccinations and control in fresh cases would lead to consumption demand and faster recovery of the overall economy which is providing fresh impetus to the markets.

The benchmark Sensex at BSE and Nifty at NSE were up by around 1 per cent in the initial trading hours on Monday in line with the strength in global markets and rise in the pace of vaccinations in India. While the Sensex was up by over 500 points and trading at new high of 56,630 at 12:30 PM, the Nifty was up by over 150 points and trading over 16,860.

While the anxiety around the Federal Reserves Jackson Hole symposium has subsided following the chairman’s remark on no rush on interest rate hikes, experts feel that domestic factors such as rise in vaccinations and control in fresh cases would lead to consumption demand and faster recovery of the overall economy which is providing fresh impetus to the markets.

How much have the markets risen?

The premier indices have traded strong in the month of August. While the benchmark Sensex has jumped over 4,000 points or 7.7 per cent in August, till date, the broader indices too have joined the rally over the last ten days even as they lagged significantly in the first half of this month. Between July 30 and August 18, while the mid cap index stood flat the small cap index fell by 2 per cent as against a Sensex rise of 5.8 per cent. However, since August 18, the mid and small cap indices have risen 1.9 per cent and 1.6 per cent respectively in line with Sensex gain of 1.8 per cent.

What is providing strength to the markets?

There is a support from global markets. The Dow Jones Industrial index on Friday rose 0.7 per cent to close at 35,455 and almost all Asian markets were trading in the green on Monday. The Hang Seng in Hong Kong and Nikkei in Japan were up 0.66 per cent and 0.45 per cent respectively.

On the domestic front, a control in rise of new cases and an uptick in pace of vaccinations have lifted investor sentiment. The anxiety around Federal Reserve’s Jackson Hole Symposium also subsided for now. While the chairman Jerome Powell said that tapering could begin this year, he also indicated that there is no rush to hike rates. It brought some relief to the markets. Powell made clear some important points that gave investors the comfort they craved at the virtual Jackson Hole event. Most notably, he indicated that tapering and interest rates are not linked, which is very important if the Fed wants to avoid a mini taper tantrum when they do pull the trigger in the coming months.

The markets have been getting big support from domestic investors. Even as inflows by foreign portfolio investors have remained weak and they invested a net of only Rs 986 crore in August (till Friday), the domestic retail and institutional participation has been very strong. The DIIs have invested a net of Rs 8,078 crore in domestic equities in August and have invested Rs 46,940 since April.

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In the April-July 2021 period, mutual funds made net equity purchases of Rs 32,155 crore as against net sales of Rs 11,140 crore in the same period of last year, reflecting the increased inflows in the funds and increased interest of retail investors in the equity markets.

Will the momentum continue?

If strong earnings in the quarter ended June 2021 provided a boost to the markets, an uptick in the pace of vaccination alongside a control in fresh rise of cases is only adding to the improved sentiment. Moderation in CPI inflation to 5.6 per cent in July 2021 from 6.3 per cent in the previous month has also come as a big positive as there are expectations that the inflation is likely to remain under 6 per cent this financial year. A softening in global crude oil prices will only help the cause.

There is a sense in the market that if India manages to keep the third wave in check and there is no other negative surprise, the markets are likely to trade strong. Retail investors, however, must invest through mutual funds and if they are looking to invest directly they must go with fundamentally strong companies.

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