Pre-poll rally kicks in as Sensex scales 21,500

Hits new high driven by FII buying undeterred by Fed's QE tapering

Dalal Street reached new milestones on Thursday as foreign institutional investor (FII) inflows continued unabated amid growing conviction that the Bharatiya Janata Party-led coalition may form the next government and the worst may be over for the economy. Both benchmark indices — Sensex and Nifty — closed at record highs after the sharp drop in the current account deficit pushed up the rupee, alleviating fears about the impact of the US Federal Reserve’s stimulus tapering on FII inflows.

FIIs poured Rs 1,272.93 crore into Indian stocks on Thursday, provisional data shows. These investors have invested about Rs 3,600 crore so far in 2014.

The rally was aided by a strengthening belief among investors and traders that the BJP’s Narendra Modi, considered pro-business, would become the next prime minister. “There is very clearly a Modi wave in the market at present. A sharp improvement in current account deficit is also being viewed positively by investors,” said Tirthankar Patnaik, director, institutional research, Religare Capital Markets.

The BSE Sensex rose 237 points, or 1.11 per cent, to close at 21,513.87, surpassing the previous closing high of 21,373.66 on January 23. The NSE’s Nifty jumped 72.50 points, or 1.15 per cent, to close at 6,401.15. The index’s previous record closing was 6,363.90 on December 9, 2013.

The rupee on Thursday ended at a near three-month high of 61.12 compared with the previous close of 61.76 a dollar. The rupee had ended at 61.04 a dollar on December 10.

India, part of the Fragile Five — a term coined by a Morgan Stanley analyst to identify Turkey, India, Brazil, Indonesia and South Africa as economies dependent on short-term FII flows to fund their current account deficits — was considered among the most vulnerable to sharp foreign selling after the start of the Fed’s stimulus drawdown on January 1. Many analysts felt the dollar would strengthen against these currencies, including the rupee, due to the tapering, making FIIs averse to riskier markets such as India.  But, the government’s steps to reduce the current account deficit, including gold import controls, and the Reserve Bank of India’s efforts to ease the rupee’s volatility have helped boost investor confidence. India’s current account deficit in the December quarter fell to an eight-year low of 0.9 per cent of the gross domestic product, from 6.5 current account deficit a year earlier.

“Sentiment has improved on macroeconomic fundamentals with relief from the twin deficits  while dilution in political risk increases confidence on better management  of growth-inflation conflicts in play. The combination of these two major factors has revived FII appetite for India,” said Moses Harding, group chief executive officer (liability and treasury management) and  chief economist, Srei Infrastructure Finance.  But, analysts do not expect the rupee to strengthen further despite the gush of FII money. “The RBI may not allow any sharp appreciation because it may need to recoup its foreign exchange reserves. If the rupee appreciates beyond Rs 61 per dollar, the RBI may step in to buy dollars,” said Anindya Banerjee, currency analyst, Kotak Securities. Since August 28, when the rupee had touched an all-time low of Rs 68.85 per dollar, it has appreciated by 11 per cent.