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Stock indices soared nearly four per cent on Tuesday, their biggest single-day gain since May 2009, as the threat of a war between US and Syria ebbed, resulting in the rupee firming and foreign institutional investors (FIIs) extending purchases of shares.
A drop in trade deficit in August, coupled with strength in other Asian markets, also aided sentiment on the Street, but analysts remain doubtful about the durability of the recent rally.
The BSE Sensex rose 727 points, or 3.77 per cent, over its previous close to end the day at 19,997.10. The NSE Nifty jumped 216.35 points, or 3.80 per cent, to end at 5,896.75. The rupee surged 2.16 per cent over its previous close of 65.25 a dollar to 63.84. (RETURN OF THE BULLS)
What boosted sentiment further was US jobs data falling short of estimates. That tempered concern that the Federal Reserve might cut stimulus this month.
Government bond yields fell sharply, snapping a two-day rising streak. Compared with Friday’s close, yield on the benchmark 10-year bond closed 16 basis points down, at 8.47 per cent. In the overnight indexed swap market, the benchmark five-year rate, as well as the one-year rate, closed 17 bps down, at 8.27 per cent and 9.09 per cent, respectively.
Global oil prices fell to about $113 a barrel after a Russian proposal to avert a US strike on Syria appeared to gather steam, easing investor concerns that another West Asian conflict might further disrupt fuel supplies.
The upside for the rupee and stocks on Tuesday, a fourth straight day, was sparked also by a slew of steps to support the rupee announced by new Reserve Bank of India Governor Raghuram Rajan.
Since Rajan took charge at Mint Road on Wednesday, FIIs have been mopping beaten-down shares. According to provisional data, these investors on Tuesday net-bought shares worth Rs 2,563.60 crore, extending purchases to a fourth day. Their domestic counterparts sold to the tune of Rs 1,398 crore on Tuesday.
Analysts like Dalton Capital India Managing Director U R Bhat consider the recent rebound in stocks and the rupee more of a technical rebound. “…Nothing has changed at the ground level. The structural problems are quite deep-rooted and they cannot be just wished away in a matter of days because of a few legislative changes,” he said.
Among several measures, Rajan opened concessional swap window for FCNR (B) deposits. This is expected to add $10 billion to the country’s forex kitty.
In the past four days, the rupee has appreciated 5.7 per cent against the dollar. This was after the Indian currency hit an all-time low of 68.85 last month.
“In the near term, 63.70/80 is a key level for the rupee; a breach could expose the level of 63.00/62.50 as well,” said Anindya Banerjee, currency analyst, Kotak Securities. “On the upside, we expect the dollar to remained capped around 65.20/50 level.”
So far in September (till Friday), FIIs have net-bought shares worth Rs 2,162.10 crore (excluding Tuesday’s provisional data). In August, these investors had net-sold to the tune of almost Rs 6,000 crore.
Asian markets firmed on Tuesday, tracking a strong closing on Wall Street on Monday. This was as concerns over a US military strike on Syria receded after the US welcomed a Russian proposal to put Syria’s chemical weapons under international control. This also led to a decline in crude oil prices for a second straight day.
In India, the trade deficit narrowed in August — to $10.9 billion from $12.3 billion the previous month — raising hopes that the worst could be over in terms of current account deficit (CAD). But, analysts said CAD faced the risk of a rebound, as the festival season in India could result in renewed demand for gold.
“Structural issues like high CAD, slowing economic and earnings growth remain,” said Dalton’s Bhat.
Broking firm India Infoline, in its strategy note released on Tuesday, said companies’ earnings growth in 2012-13 was the weakest in a decade and was expected to further slow down in the current financial year — to the previous lows of 2001-02 and 2008-09.
Nomura said in a research report that an environment of better global growth and weak domestic demand should correct the CAD this financial year. “We expect financing of the deficit to remain difficult,” Nomura said.
