India’s BSE Sensex Stock Market Closes at Record High

India’s BSE Sensex 30-pack index on Thursday settled at a new closing high of 62,272.68, up 762.10 points or 1.24% extending its rally to the third straight day. During the day, it jumped 901.75 points or 1.46 per cent to its lifetime high of 62,412.33 led by large caps. The move tracked a firm trend in global markets after the US Fed minutes indicated a slower pace of rate increase that bolstered investors’ sentiment. Policy-sensitive tech shares benefited from the release and led the gains, with Infosys, HCL Technologies, and Tech Mahindra adding between 2.5% and 3.3%. Banks also had strong gains, led by a 2% advance for HDFC Bank.

Wipro, Power Grid, Tata Consultancy Services, Hindustan Unilever, HDFC and Mahindra & Mahindra were also strong gainers. The NSE counterpart, Nifty50, settled 216.85 points or 1.19% higher at 18,484.10, hitting a new 52-week high of 18,529.70 earlier. The buying was also fueled by short covering on the last day of the current month’s derivatives expiry series.

The ongoing sharp correction in crude oil is a big positive with India being a major importer. Global oil benchmark Brent crude futures declined 0.32 per cent to 85.14/bbl., a long way from $130/bbl.

MSCI Emerging Market Index

Another factor is index weighting and overseas buying is helping the Indian markets. India has almost doubled its weight in the MSCI Emerging Market Index to 16 percent in the last two years to become the second-largest market in the index, according to the data available at the end of October 2022. Foreign institutional investors (FIIs) were net buyers in the capital markets on Thursday as they purchased shares worth Rs 1,231.98 crore, according to exchange data. Last month with the Rupee’s decline Investors had continued pulling out of domestic equities during the period, taking the total outflows to almost $29 billion in 2022.

China has seen its weightage fall below 27 percent for the first time since Q1CY17 as the Shanghai Composite and Hang Seng indices are down 15 percent and 25 percent, respectively, year to date.

Indian Bond and Currency Markets

Bonds

Currency spreads and yields were affected by Fed policymakers showed broad consensus that it would be ideal to slow the pace of rate hikes to better evaluate the transmission of monetary policy from the previous rate increases and reduce the risk of overtightening, although various members expect a higher terminal rate. The US markets are closed for Thanksgiving today and only partially opened Friday.

India’s bond yields ended lower on Thursday after the minutes of the US Federal Reserve’s November meeting signaled a slower pace of rate hikes moving forward. During the day, yields moved in a narrow range as traders adjusted their positions ahead of the weekly debt auction on Friday.

The benchmark 10-year government bond yield ended at 7.255% versus its close of 7.291% on Wednesday.

Rupee

The Indian Rupee continued to appreciate from lows earlier in the month though it was capped as importers were active in the markets. The US dollar index, a basket of six currencies, slipped 0.19 per cent to 105.87. The Indian rupee had decline to a lifetime low last month weakening beyond 80 a dollar to 83.28 amid rising interest rates in the US and risk-off sentiment. The hawkish stance from Fed pushed the dollar to two-decade highs. Additionally, soaring crude oil prices, weakening in the Chinese yuan and foreign funds outflow impacted.

This added to angst over imported inflation as well as an external deficit blowout, prompting analysts to draw compare with the taper tantrum of 2013.

The developments evoked memories of the 2013 “taper tantrum” when emerging market currencies slumped as the US dollar and yields surged in response to the Federal Reserve’s signal of winding down its quantitative-easing policy. In India, the sliding rupee left a trail across trade, consumer prices and corporate earnings. 

Back at the Rupee falling to new lows UBS Securities India Chief Economist Tanvee Gupta Jain said. “India’s currency risk seems to be the key focus among investors,” and “External sector risks persist and there is concern if this could create a funding challenge should global financial conditions continue to tighten.”

India’s trade deficit hit record levels driven by the highest monthly import bill of more than $60 billion with oil, LNG and coal prices soaring. Resurging global energy prices and a falling rupee, could further widen the current account gap to its highest level in a decade to over 3% of gross domestic product in the fiscal year ending March. The record highs in the BSE 30 underscore how important falling oil prices are to India’s economy.

Exporters haven’t benefited from the weak currency as other currencies are also falling in tandem. Indian rupee is expected to remain under pressure in 2023. The rupee is currently around 81.6 against the US currency. The local currency weakened significantly by over 10% against the greenback in the current year due to macroeconomic uncertainties and is down 9.58% year on year versus the US dollar.

Companies with foreign currency debt are also vulnerable to rupee depreciation. About $79 billion worth of foreign debt, which makes for 44% of the total overseas borrowings by Indian firms, are unhedged, according to RBI. Both cost of repaying and rolling them over has increased after rupee’s sharp slide against the dollar.

Morgan Stanley on Indian Stocks

Global investment bank Morgan Stanley earlier this month said it is ‘underweight’ on India in its market allocation framework from a tactical and valuation perspective, but it sees compelling long-term opportunities in certain pockets which keeps it binding to the market.

“The diversification trend is propelled by both global narratives (eg structurally higher commodity price, multipolar world investing) and idiosyncratic stories in EM (eg the implications of social and economic infrastructure laid the foundation for the New India, the reform agenda in the Middle East and China’s shifting growth model under the Regulatory Reset and Common Prosperity),” Morgan Stanley said.

Morgan Stanley downgraded India’s healthcare sector to ‘underweight’ due to unattractive valuations, upgrading India Industrials and India Utilities to ‘equal-weight’ on an ongoing capex boom to drive growth.

MS remains ‘overweight’ on India Financials saying, “the progress made on the foundational ID and emphasis on infrastructure likely will lead to a credit boom, benefiting the financial sector while higher household income also helps the sector through improved insurance pricing and greater penetration.”

Inflation Risks

India is one of the world’s biggest energy importers makes it vulnerable to global price shocks and therefore currency volatility. A 5% fall in the rupee pushes up inflation by about 20 basis points, according to a study by the Reserve Bank of India.

Consumer price gains have topped the central bank’s 2%-6% mandate since the start of this year for a 10th consecutive period. Any immediate pass-through of softer global commodity prices is unlikely given the nearly 10% year-to-date fall in the rupee. 

India’s retail price inflation eased to 6.77 percent year-on-year in October 2022, down from September’s five-month high of 7.41 percent, helped by slower rises in food prices and a strong base effect. On a monthly basis, consumer prices rose 0.80 percent in October, the most since May.

India Inflation Rate

Costs increased at a softer rate for food (7.01 percent vs 8.60 percent in September), fuel and light (9.93 percent vs 10.39 percent), pan, tobacco and intoxicants (1.87 percent vs 1.98 percent), and miscellaneous (5.90 percent vs 6.06 percent). Inflation was little changed for housing (4.58 percent vs 4.57 percent) and clothing and footwear (10.16 percent vs 10.17 percent).

Corporate earnings for sectors that rely heavily on imported raw materials such as automobiles, steel and electronics will bear the brunt of a falling currency. Higher costs will eat into margins and impact profitability for companies.

Source: Bloomberg, RBI, TC, Trading Economics

From The TradersCommunity Research Desk