Markets log best performance in 16 months on strong portfolio flows

The Nifty conquered the 10,000 mark, while Sensex rose 5.2% to end above 32,500, an all-time high

Investor optimism towards the Indian markets was on display in July as the benchmark indices posted their best monthly gains since March 2016. 

The Nifty conquered the 10,000 mark for the first time, with a gain of nearly six per cent, while the Sensex rose 5.2 per cent to end above 32,500, an all-time closing high. The stellar show in July has taken the year-to-date gains to more than 21 per cent. The rally was led by blue-chip stocks, with the broader markets underperforming the benchmarks. The BSE MidCap and SmallCap indices have gained five per cent and four per cent, respectively.

According to market participants, this positive performance of Indian equities was on robust portfolio flows from domestic and foreign investors. Satisfactory monsoon and a positive environment in the global markets contributed to the sharp rally. On the policy front, investors cheered implementation of various reform measures, especially the goods and services tax (GST), which came into effect from July 1.

“July was a positive month for Indian markets,” said Deven Choksey, managing director, KR Choksey Securities. “One striking feature of the current markets is ample liquidity, aided by strong institutional flows. During July, the focus of the institutions also turned to large-cap stocks from broader markets, as these were available at reasonable valuations.” 

For instance, shares of index heavyweight Reliance Industries (RIL) surged 17 per cent in July. On similar lines, shares of State Bank of India (SBI) and HDFC surged 14.2 per cent and 10.5 per cent each, data showed. Analysts expect the Indian markets to do well from a medium- to long term-perspective. However, there could be a brief correction in the near term. Second-quarter corporate earnings would be a key trigger. Analysts have already predicted the earnings recovery to be at least two-three quarters away, as the implementation of the GST could prove to be a short-term disruption.

Illustration by Ajay Mohanty

“Due to GST disruption, quarterly results could be disappointing,” said Motilal Oswal, chairman and managing director, Motilal Oswal Securities. “On the other hand, domestic inflows are very strong and acting as a strong resistance for a market correction. From a short-term perspective, the market appears overheated and a correction cannot be ruled out.” 

The Indian markets outperformed the major global markets in July, with the exception of Hong Kong and South Africa. 

Market participants say India’s outperformance was on account of large-scale unwinding undertaken in the futures market by offshore derivative instrument (ODI) subscribers. Markets regulator Securities and Exchange Board of India had come up with a circular in the first week of July, banning all ODI subscribers from taking unhedged derivative positions in the Indian markets. Following the order, a majority of ODI subscribers unwound their derivative positions, leading to a spurt in foreign buying. Foreign portfolio investors bought equities worth Rs 3,706 crore ($578 million) in July.

Domestic mutual funds (MFs), who have been key buyers in the Indian markets in the past two years, continued to stack up equities in July. The MFs net purchased equities worth Rs 8,129 crore during the month, data showed.