The benchmark Sensex at the BSE reclaimed the 60,000 mark after over four months on the back of moderating inflation, decline in global commodity prices and inflow of foreign portfolio investors (FPIs) into the Indian markets. The broader Nifty at National Stock Exchange (NSE) too crossed 17,900 on Wednesday.
Over the last two months, the Sensex has jumped 17.2 per cent from 51,360 to cross 60,200 on Wednesday.
The FPI-led rally
While the foreign portfolio investors have been major sellers between October 2021 and June 2022 selling over Rs 2.5 lakh crore worth of equity holdings, they turned net investors in July and have come back with strong investments in August. In July the net investments by FPI stood at Rs 4,989 crore and that in August till date amounts to over Rs 23,800 crore.
Experts say that while the domestic retail and institutional investors continued to support the equity markets through their inflows over the last 10 months, the re-entry of FPI is providing a fresh thrust to the markets.
Softening inflation turns sentiments positive
The biggest factor has been a moderation in domestic inflation over the last couple of months with the CPI numbers for July coming down to 6.71 per cent. The inflation numbers had hit 7.79 per cent in April following a sharp rise in global crude oil prices and international commodity and food prices. However, as inflation has started to soften, it has lifted investor sentiments as a decline in inflation would lead to margin improvement for companies and also benefit India as an economy on account of the current account deficit and fiscal deficit.
Even globally there has been softening in inflation and the US reported a decline in July inflation to 8.5 per cent from 9.1 per cent in June.
Will the rally continue?
Market participants feel that since inflation is on a declining trajectory worldwide, equity markets may continue to rally. Also, a decline in inflation ahead of the festive season in India comes as a boost for companies that hope to witness a jump in sales this year. Economists say that while inflation continues to stay at elevated levels, their trajectory downwards is providing comfort and companies may witness an improvement in their margins in the third quarter which may provide fresh impetus to the equity rally.
They, however, advice caution to investors looking to make lump-sum investments and instead argue for a staggered mode of investing.
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