Market rally continues on rupee recovery

Analysts caution strength may be short-lived, underlying growth indicators still weak

Indian stocks followed the rupee’s recovery, ending the week with a gain of 3.5 per cent, the highest weekly gain in two months. The rupee appreciated, owing to recent measures announced by new central bank governor Raghuram Rajan.

Analysts, however, caution the strength could be short-lived, as the underlying growth indicators are still weak. “The relief rally has largely to do with the statements made and measures with respect to the currency taken by RBI, which has given some comfort to the markets. However, this is just a short-term movement; issues related to growth still exist and it would be a while before the markets see true recovery,” said Dhananjay Sinha, co-head (institutional research), Emkay Global Financial Services.

On Friday, the BSE Sensex closed at 19,270, a gain of 1.5 per cent, while the National Stock Exchange Nifty closed at 5,680, a rise of 1.6 per cent. The rupee rose 0.7 per cent through the week.

Market analysts said the appointment of the 23rd RBI governor had infused a certain confidence in the markets, leading to a short-term rise in the rupee and equity markets. “The market has taken note of the new governor, who seems more pro-growth than his predecessor. Going ahead, markets should actually go up if the rupee continues to appreciate,” said Niraj Kumar, head (equity investments), Aviva Life insurance.

On Friday, the rise in the markets was primarily led by a rise in banking stocks, one of the worst performers this year. In the last two trading sessions, banking sector stocks have risen 11.3 per cent.

Fund managers said investors had been dumping defensive stocks such as information technology and pharma in favour of high-beta sectors such as banking and capital goods. The BSE capital goods index rose 2.7 per cent on Friday.

“Banking stocks had been the worst affected and the rise in the last few trading sessions is not justifiable. These beaten-down stocks would be the first ones to fall when the market reverses its stand,” said Raghavenra Nath, managing director at Ladderup Corporate Advisory.

Technical analysts said the Nifty could see resistance after touching 5,900-odd levels and this would lead to a reversal.

On Friday, foreign institutional investors (FIIs) were net buyers at Rs 800 crore, against Rs 1,101 crore of shares bought on Thursday. Domestic investors net-sold shares worth Rs 238 crore. Analysts said buying by FIIs was unlikely to continue, as further foreign flows would depend on the US Federal Reserve’s Federal Open Market Committee meeting to be held later this month and the consequent measures taken by RBI in its policy review on September 20.