50,000 & still counting: liquidity pushes markets, all eyes on Budget now

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A file picture of the BSE building in Mumbai.

The benchmark Sensex Thursday breached the 50,000-mark for the first time before retreating to close at 49,624, a fall of 167 points or 0.34 per cent over Wednesday’s closing.

The rise and rise of markets over the last few months has been driven by a combination of external factors: global liquidity, vaccine hopes, US election outcome, alongside the growing strength in the domestic recovery. But market experts said that the factors shaping its future momentum will be the nature of the government’s spending programme to be unveiled in the Budget, the duration of RBI’s monetary stimulus and the check on inflation.

The Sensex, which surged to a high of 50,184, finally closed the day at 49,624.76, a loss of 560 points from the day’s high level.

If the near 70-per-cent rise in markets since April 1, 2020 has come despite the economy contracting and being caught in the pandemic quicksand, market participants remain optimistic over the flow of funds into Indian equities by foreign portfolio investors. Between April 1 and January 21, the FPIs have invested a net of Rs 2,41,021 crore into Indian equities, the highest ever in any year.

Rashesh Shah, chairman and CEO, Edelweiss Group, said that if a smooth transition in the US has been a big positive, the bounce-back in domestic economy has been very strong given the uptick in steel, cement, auto, real estate and in broader consumption. Arguing that the economy needs support for at least one more year before it can take off on its own, Shah said: “For the next 12-18 months, the government needs to spend and they have got the liberty to spend because of Covid; even the RBI needs to maintain its liberalism. Spike in inflation and early tightening of monetary policy by RBI are the biggest risks for now.”

There is a broader sense that with the global liquidity continuing and an additional US stimulus on its way, the markets are likely to continue with their upward movement for now.

“Overall, we expect the upward journey to continue on the back of healthy corporate earnings, strong liquidity, positive developments on the vaccine front, broad-based economic recovery and low interest rates,” said Motilal Oswal, MD&CEO, Motilal Oswal Financial Services. “Buzz around the upcoming Budget has also added strength to the markets.”

While the gain of 5,000 points in Sensex has come in around 32 trading sessions, Deepak Jasani, Head of Retail Research, HDFC Securities, said that this reflects the expectations of a turnaround in the economy post-Covid vaccinations and continued FPI inflows. “After the Budget, we may witness a temporary brake to the uptrend and further up move from hereon will depend on the pace of economic and corporate earnings growth and the trajectory of inflation and interest rates in India and the world,” Jasani said.

Significantly, the surge has not been restricted to a few stocks and sectors. If the Sensex has risen by 68 per cent, the mid and small cap indices at BSE are up 80 per cent and 93 per cent respectively in the same period. Among sectoral indices, while Auto index has jumped 117 per cent, metal and IT indices are also up by 110 per cent and 105 per cent respectively. Technology, capital goods and healthcare, banking and consumer durable indices, too, are up by over 60 per cent.

Indices include better-run companies and so the rise in also reflective of the fact that good and strong companies have done well. Investors have to be cautious while venturing into random stocks in the mid and small cap space.

Waqar Naqvi, CEO, Taurus Mutual Fund, said that the rally in banking, PSU, metals, auto and IT sectors helped the Sensex touch 50,000. “If midcap stocks join the party, which is a high probability, on the back of the vaccinations and anticipated announcements in the central Budget to boost demand, the stock markets should continue to do well in the foreseeable future. From this level, minor ups and downs are not going to bother investors,” he said.

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