Bullish Moody's pulls up bears, 510-point toast to India upgrade

But experts caution market rally may not last long as overall outlook remains negative.

After a five-session losing streak, Indian stock markets rebounded sharply on the back of a strong overnight rally in the US and a Moody’s upgrade of India’s local currency debt rating.

The Bombay Stock Exchange Sensitive Index, or Sensex, which opened about 312 points higher from its previous close, surged 510.13 points, or 3.29 per cent, to close at 15,674.81. The 50-stock Nifty index of the National Stock Exchange (NSE) gained nearly 149 points, or 3.28 per cent, to close at 4,693 after briefly the crossing 4,700 mark. Year-to-date, the Sensex is down 23.5 per cent.
 

SECTORAL INDICES
	21-Dec	% chg*
Bankex	9,416.41	4.92
Cons. durables	5,292.28	4.10
Oil & Gas	7,925.49	3.72
Metal	9,521.20	2.65
Auto	8,128.80	2.56
Power	1,780.48	2.56
IT	5,749.45	2.48
Cap. goods	8,013.04	2.09
Realty	1,385.68	1.34
Healthcare	5,841.00	1.08
FMCG	4,037.36	0.93
*Change over the previous close Compiled by BS Research Bureau

“There was no bad news today. The rally in global markets and the Moody's upgrade led to short-covering in beaten-down counters," said Monal Desai, head of institutional equity derivatives at Prabhudas Lilladher.

According to him, there were huge short positions in counters like ICICI Bank and Axis Bank. “Some of those positions have been covered, resulting in gains for these stocks," he added. The rally was sparked by good news from the US markets. Both the major US indices, Dow Jones Industrial Average and S&P 500, rose nearly three per cent each on Tuesday as better-than-estimated housing data added to expectations the world’s largest economy would be able to weather Europe’s debt crisis.

The dollar index, which had risen sharply (by two percentage points) to 80.5 levels between December 9 and 14, has also given up gains, albeit marginally. The greenback and riskier assets like equities and commodities typically have an inverse relationship. So, when the value of the dollar falls, riskier assets rise. This provided further support to the markets. The rupee appreciated by 40 paise or 0.75 per cent on Wednesday.

The market gained further momentum when Moody’s raised India’s local currency debt rating by one notch to the lowest investment grade while keeping a stable outlook for the country. Now, local debt stands at the same rating as foreign-currency bonds. Banking stocks, thus, were among the biggest gainers, helping the BSE Bankex top the gainers’ chart.

“The stable outlook on India’s rating reflects Moody’s medium-term assessment of the country’s growth, fiscal, and balance of payments outlook, relative to other countries,” Moody’s said. The upgrade for India came after almost a year and a half. Moody’s had last upgraded India’s local currency debt on July 26, 2010.

All the BSE sectoral indices ended in the green, with banking and consumer durable indices gaining four per cent each. However, only three sectors have outperformed the Sensex. The BSE small-cap and mid-cap indices gained marginally, by just 0.94 per cent and 1.29 per cent, respectively.

“If there is no negative news, the Nifty could rally up to 4,820-4,850,” says Desai. “Since the Indian market has corrected so much, a relief rally was overdue. The overall outlook still remains negative,” said Saurabh Mukherjea, head-institutional equities, Ambit Capital.