Markets scale new highs on Budget hopes

Sensex rises to 25,841; rupee firms up vs dollar; FIIs pump Rs 3,500 cr in 3 days

The Indian stock indices touched fresh all-time highs on Wednesday, mainly driven by foreign investors who went for robust buying on hopes the new government would announce steps to strengthen the economy in the coming Union Budget.

Finance Minister Arun Jaitley's recent comments - "mindless populism" in policy making needs to be checked and high fiscal deficit and inflation pose major challenges to the country - sparked hopes among investors that the government was ready to take difficult measures to bring the economy back on track.

In what appeared to be a strong endorsement of Jaitley's views ahead of next week's Budget presentation, the BSE Sensex on Wednesday rallied 324.86 points, or 1.27 per cent over its previous close, to end the day at 25,841.2, topping the previous all-time high of 25,583.7 on June 10. The National Stock Exchange's Nifty also closed at a record high. It rose 90 points, or 1.18 per cent, to close at 7,725.15.

The optimism wasn't restricted to equities alone. The rupee gained the most in over six weeks to end at 59.69 a dollar, compared with its previous close of 60.08. The yield on the 10-year benchmark government bond softened from Tuesday's 8.74 per cent to 8.66 per cent.

 

"Though India's macro environment remains an issue, with weak growth and persistent inflation, there is widespread euphoria," Bhuvnesh Singh, managing director & head of India research at Barclays Capital, said in a note. "In the run-up to the Budget, the government has made all the right noises and raised expectations."

On Wednesday, foreign institutional investors (FII) pumped nearly Rs 1,300 crore ($210 million) into Indian stocks, taking their year-to-date investment tally to $10 billion.

In the three trading sessions so far this week, FIIs have net-bought shares worth nearly Rs 3,500 crore, helping the Sensex add 740 points.

"We expect the finance minister to focus on fiscal consolidation in Budget 2014-15. He will likely retain the gross fiscal deficit target of 4.1 per cent of gross domestic product set in the interim budget," wrote Jyotivardhan Jaipuria, head of research at Bank of America Merrill Lynch. He expects mid-cap stocks to outperform large-caps and domestic plays like automobile, cement and banks to do better than export-driven themes.

All sectoral indices of BSE ended with gains on Wednesday, indicating buying was across the board. The BSE Metal and BSE Power indices gained the most - around two per cent each. Sterlite Industries, NTPC and BHEL were among the Sensex stocks that gained the most.

Analysts believe the market could gain even further in the run-up to the Budget. "Nifty is expected to trade with a positive bias and scale up to the 7,900 level. The spike in crude oil prices due to tensions in Iraq had dented the rally last month. However, the negative trend has reversed and we are seeing robust buying by foreign investors and market now focusing on the coming Budget," says Yogesh Radke, head (quantitative research), Edelweiss Financial Securities.

Some experts, however, warn that the Street pricing in high expectations could pose a risk. "The National Democratic Alliance government's maiden Budget does not have a full year for implementation, but expectations are sky-high," said Tirthankar Patnaik, India strategist at Religare Capital Markets. "Our view is that the Budget might not be a panacea, but certain principles (adherence to fiscal prudence, widening the tax base and ensuring sound tax laws) must be maintained."