After the Nifty and Sensex ended with the biggest gains in 39 months, experts pointed to a likely encore on Tuesday – If the final results match pollsters’ predictions, that is. On Monday, the Nifty rallied 808 points or 3.58% to the day’s high of 23338.70, before closing 3.25% up at 23,263.90, while the Sensex soared 3.75% to a life high of 76738.89, before closing up 3.39% at 76468.78.
A key reason for the exuberance was the combined effect of cash purchases and short-covering by foreign portfolio investors (FPIs), who have been selling Indian stocks over the past two months. These investors covered their short positions worth ₹7,806 crore on Monday. Coupled with their cash market buying, the effect of their overall purchases was ₹14,656 crore.
Exit polls released on Saturday showed NDA expanding its Lok Sabha seat count to 350-370. Prime Minister Narendra Modi has set a goal of 400-plus, against the required simple majority of 272. Last week, Modi asserted that the NDA will be back with a bigger majority, and that the stock markets will hit record highs on 4 June.
Long-term impact
“If indeed the results surprise on the upside, say, 400 for the NDA, it will be another 2-3% rally before we settle down and begin focusing on the upcoming budget, earnings, etc,” said Raamdeo Agrawal, chairman & co-founder of Motilal Oswal Financial Services. “If the actual count’s closer to 300, we could be in for some profit-booking . Let’s keep our fingers crossed.”
However, Agrawal said the short-term impact of 400 seats is being “overestimated” but the long-term impact is being “grossly underestimated.” “The world is looking at the results this election throws up. If Modi gets a third term with 400 seats, it would enhance the world’s perception about him and his policies in a vast democracy like India. The (longer term) impact would be an appreciation of the rupee, Reserve Bank of India mopping up dollars to curb rupee appreciation, thereby increasing its reserves, more inward remittances by NRIs and last but not least, improvement in the country’s global credit ratings,” explained Agrawal.
At present, India’s sovereign rating is just a notch above junk; a rise in rating would mean India will be able to raise money overseas at relatively cheaper cost. Last week, S&P Global raised the outlook on India’s sovereign debt from stable to positive, raising hopes of an eventual ratings upgrade.
Shifting focus
Veteran investor Shankar Sharma, founder of GQuant Investech, also believes that a “lasting impact of a higher margin of victory than the exit polls predicted is unlikely beyond Tuesday.”
“There could be another 2-2.5% rally tomorrow (Tuesday) if the results surprise on the upside. Thereafter, it would be back to business when markets will take stock of quarterly results, GDP growth and the Union budget,” Sharma said, adding that many stocks were “priced to perfection.”
The Indian economy grew at a forecast-breaking 8.2% in FY24, backed by key sectors including manufacturing, construction, mining and services. “It is worthwhile to note that the manufacturing sector witnessed a significant growth of 9.9% in 2023-24, highlighting the success of the Modi government’s efforts for the sector,” finance minister Nirmala Sitharaman posted on social media platform X after the release of the GDP data.
Valuation bloat
Indeed, the recent rally has bloated valuations, with Nifty 50 trading at an 18.13 times one-year forward price to earnings multiple (P/E) against its five-year average of 17.96 times, as per Bloomberg data. The broader markets are even more stretched, with Nifty Midcap 150 at a one-year forward PE of 27.77, against a historic average of 22.47 and the Nifty Smallcap 250 at 18.94 (15.74) according to Bloomberg data.
Given the stretched valuations, earnings have much catching-up to do. Large-cap earnings could be rise 13-14% in the next couple of years, while mid- and small-cap earnings could grow around 23-24%, said A. Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC.
The rupee gained 32 paise to the dollar at 83.14, as FPIs purchased shares worth a provisional ₹6850.6 crore, higher than DIIs’ share of ₹1913.98 crore. The 10-year bond yield softened by four basis points to 6.94% as the rupee appreciated.
The FPI about-turn
Apart from cash buying, FPIs also cut index futures hedges by a whopping 121,423 contracts to 196,944 contracts, aiding Monday’s rally. They were also net short index calls and index put options by 688,393 contracts and 401,795 contracts each before Tuesday’s event. This will spread their risk in case the market rises or falls post the event.
FPIs have been bearish on Indian shares so far this fiscal, selling ₹32,080 crore through 31 May, NSDL data showed. Over the same period, local institutions have purchased shares worth ₹101,833 crore, as per BSE data .
Agreeing with his peers in terms of market reaction on Tuesday, Nilesh Shah, managing director, Kotak Mahindra AMC, said that markets had “discounted political continuity and would focus on the 100-day roadmap, upcoming Budget and monsoon after Tuesday .”
New agenda
The new government’s 100-day agenda may have five key elements – infrastructure, manufacturing, semi-conductors, renewable energy, and housing. New bills likely to be taken up may cover amendments to insurance laws, bankruptcy laws, changes to bolster the National Company Law Tribunal, and a stricter governance framework for large unlisted firms.
PM Modi has already promised that Ayushman Bharat heath insurance would be expanded to provide free cover to all senior citizens above 75. Also, a Viksit Bharat Vision 2047 plan would be unveiled that would provide direction of reforms in various sectors to transform India into a developed economy by 2047.
“The markets will be eager to see how the government utilizes the extra ₹1 trillion received through the RBI dividend, which will be spelt out during the Budget,” said Kotak’s Shah. The RBI announced a ₹2.11 trillion dividend to the government for FY24, almost twice the amount financial markets had anticipated.
The Centre is looking to trim some of its long-term debt following the hefty RBI dividend, allowing it to spend more on infrastructure and development projects, two people aware of the matter said. “As most government bonds carry fixed coupon rates, exemption or repurchase of these, especially longer duration ones, helps in keeping the interest outgo under check,” one of the two people said on condition of anonymity.
Investor wealth
Investor wealth rose a whopping ₹13.6 trillion over the weekend, with BSE’s all-India market capitalization rising to $5.12 trillion from $4.93 trillion on Friday. NSE’s market cap also rose above $5 trillion, touching the $5.08 trillion mark for the first time on Monday.
Reliance Industries, HDFC Bank, State Bank of India, ICICI Bank and Larsen & Toubro, contributed to over half of the Nifty’s 733-point gain on Monday. Other highlights included the market cap of SBI, which hit a life high of ₹912, at ₹8.11 trillion falling short by just ₹8000 crore of ICICI Bank’s market cap of ₹8.19 trillion.
Fourteen of Nifty 50 constituents hit life highs, including RIL, Adani Ports, Axis Bank, SBI and ICICI Bank.
Interestingly, Nifty options expiring on 6 June have open interest put-call ratio of 0.89 implying only 89 puts being sold for every 100 calls sold. This is normally done when option sellers expect markets to not to make a runaway rally.
With inputs from Dipti Sharma in Mumbai and Subash Narayan in New Delhi
