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Saturday, February 24, 2024

Breaking down the confluence of factors driving bull rally in Bharatiya bourses

The two Indian stock markets – BSE and NSE- are witnessing a bull rally on the back of positive economic and political factors, said industry experts and an economist.

The Sensex of the BSE is nearing 70,000 points while the NSE’s Nifty 50 touched 21,000 and has come down slightly recently.

They also said the speed at which the stock market indices are rising will get moderated.

“Surely, this is a bullish period for the Indian stock markets. BSE Sensex and Nifty have given one year returns of 11.6% and 12.7% respectively. But the returns from mid and small cap stocks have been significantly higher with BSE MidCap and BSE SmallCap indices delivering annualized returns of 34.6% and 37.7% respectively as on December 8. Over the last one month, the BSE Sensex and Nifty have returned 7.7% and 8.1% respectively. These are indications of a strong bull market,” Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research, told IANS.

“A confluence of many positive events has led to this kind of sustained up run. Q2FY24 results were largely in line; macro numbers in India continue to be positive. State elections outcome pleasantly surprised market participants; inflation seems to be coming under control. Ten-year bond yields in US have fallen sharply after forming a high of 5%. Foreign Portfolio Investors (FPI) have returned to Indian markets post mid-November. All these have resulted in providing positive triggers to the stock markets,” Dhiraj Relli, Managing Director and CEO, HDFC Securities Ltd told IANS.

Elaborating further, Chowdhury said the market is driven by three fundamental factors- strong gross domestic product (GDP) growth, no further interest rate hike expected by the US Federal Reserve and BJP winning the elections in three major states.

“Strong domestic GDP growth which is reported at 7.7% for the first half of the fiscal; despite some expected moderation in the second half, GDP growth for FY24 is expected to average between 6.5%-7.0% which will clearly place India as the fastest growing economy among the larger nations,” Chowdhury said.

“The expectation of no further interest rate hikes in December-23 by the US Fed followed by a rate cut in another three months in global markets which will lead to a renewal of FPI flows to Indian markets.

“The BJP won elections in three north Indian states in early December which has significantly raised the likelihood of a clear majority for the party in the upcoming general elections, translating into political stability and higher prospects of economic reforms over the next 2-3 years,” Chowdhury added.

As regards the duration of the bull run, Relli does not see any sharp fall in the markets unless the positive factors listed earlier get reversed.

“The key headwinds to this rally include two consecutive events that could impact the global risk appetite severely. This may be geo-political, or policy led or large Lehman Bros like event.

“if a large impact of erratic monsoon is felt in terms of kharif output or reservoir levels or inflation, then we may see some reversal in investor mood. However for the next few weeks we do not anticipate any such thing happening. Normal profit taking or sector/stock rotation may keep happening in the meanwhile,” Relli said.

Having said that, the speed of rise from here could moderate and we might see bouts of corrections thrown in between, Relli added.

According to Chowdhury, the markets may be impacted depending on the Q3 corporate results if they indicate growth/slowdown.

Even though the markets are seeing a bull run, there are a couple of dull sectors or under performers.

“Relatively information technology (IT) and fast moving consumer goods (FMCG) sectors have been underperformers lately. The IT sector is suffering from a slowdown in the western world and disruption in technology space due to the advent of artificial intelligence and machine learning. As the revenue visibility of IT companies is not as bright as in the past and there is pressure on margins, companies are delivering muted numbers and guidance,” Relli said.

The fortunes of the IT sector would turn for good when the outlook on growth in the western world improves and there is an urgency to spend on technology. The timeline for such a happening is not clear now, Relli stated.

As regards the FMCG stocks, they suffer from low volume growth and down trading especially from the rural areas despite a fall in raw material costs.

“Rural incomes are not growing at the same pace as in the past due to weather conditions. Also regional competition has emerged in select pockets through the country giving some competition to national players. This situation can change when the rural incomes start rising at a fair pace and material costs inch up which will bring pressure on smaller players,” Relli said.

Be that as it may, as regards the market drivers, experts said FPIs, domestic institutional investors (DII), high net worth individuals (HNI) and retail investors are putting their money in the stock markets.

According to Relli, FPIs have returned to being buyers post mid November after being sellers in September and October. Domestic investors especially retail and HNI have been buyers throughout and offsetting the selling by FPIs.

“The domestic investor base has now become a reliable counter force to FPIs. The share of FPIs and domestic investors keeps changing from month to month. Though local investment can sustain the markets at a given level, lack of aggressive selling by FPIs and/or sustained buying by them could take the markets higher in a short period of time,” Relli said.

According to Chowdhury, the investments by the foreign institutional investors have picked up in November and the first week of December.

“The expectation that interest rates have already peaked in the US and other developed economies and rates will be cut in a few months, is leading to renewed flows to developing nations particularly India,” he said.

(This article has been published via a syndicated feed)

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