Sensex tops 35,000 as banks rally after govt cuts borrowings to Rs 200 bn

So far this financial year, FPIs pumped in over Rs 20 billion into domestic stocks, helping Sensex climb 3%

A sharp rally in banking stocks saw the benchmark Sensex top the 35,000-mark for the first time, while the 50-share Nifty inched towards 10,800 on Wednesday. Benchmark indices gained close to one per cent as investor sentiment got a boost amid cooling of bond yields after the government announced a cut in additional market borrowing for the current financial year.

The BSE Sensex gained 0.89 per cent, or 311 points, to 35,081.82, while Nifty ended 0.82 per cent, or 88 points higher at 10,788.55.

Axis Bank gained 4.7 per cent, most among Sensex components, followed by State Bank of India (SBI), which gained 3.4 per cent and ICICI Bank that rose 2.7 per cent after the yield on the 10-year government security softened by 12 basis points to 7.26 per cent. A day earlier, banking and financial shares had tumbled after the 10-year bond yield had jumped 11 basis points.

"The market momentum continues to remain strong due to optimism by both domestic and foreign investors," said Motilal Oswal, chairman, Motilal Oswal Financial Services. "Investors are expecting a turnaround from December quarter earnings. Results posted so far, particularly by technology companies, have been good. The market is also expecting the government to announce higher spending in the budget, which will be good for the economy," he added.

On Wednesday, foreign portfolio investors (FPIs) bought shares worth Rs 6.25 billion, while domestic investors were net buyers to the tune of Rs 1.7 billion.

Surging bond yields and fears of fiscal slippages have spooked investors in the recent past. Experts said Wednesday's announcement helped soothe some nervous.

"The lowering's of additional borrowing requirement for the current financial year to Rs 200 billion from Rs 500 billion estimated earlier has been welcomed by the market participants," said Dhiraj Relli, MD & CEO, HDFC Securities.

Besides bank, IT shares extended their gains with Infosys gaining 2.6 per cent and TCS adding 1.4 per cent. Tech shares are seeing buying interests after decent December quarter earnings and upgrades by brokerages on hopes higher growth this year.

It has taken mere 16 trading sessions for the Sensex to move from 34,000 to 35,000. HDFC, Infosys, TCS and ICICI Bank have contributed nearly 700 points to the latest 1,000-point gain.

So far this financial year, FPIs have pumped in over Rs 20 billion into domestic stocks, helping the Sensex climb three per cent. Last year, the Sensex had gained 28 per cent amid huge inflows from equity mutual funds. Following the sharp gains, the 30-share Sensex now trades at 19 times its one-year forward estimated earnings, much higher than its long-term average of 16 times.

In recent months, shares of companies aligned to the housing and rural economy have also been gaining on hopes of higher spending by the government.

"Stocks in housing, infrastructure and rural sectors have jumped sharply in the past few months in anticipation of higher government spending and subsequent recovery in volumes, revenues and earnings. However, the government's ability to spend will depend on its fiscal position. The market's optimism may be belied if GST revenues were to fail to pick up meaningfully from current levels," said Sanjeev Prasad, co-head, Kotak Institutional Equities.