Sensex soars to 3-yr high on Fed

The Indian equity markets on Thursday closed at near three-year highs as risky asset classes around the world rejoiced the US Fed’s decision to postpone the much-feared tapering of its $85-billion-a-month bond-buying
programme.

The benchmark Sensex surged 3.43%, or 684.48 points, to close at 32-month high of 20646.64, just a couple of percentage points shy of its all-time high of 21004.96 of November 2010. The Nifty too surged 3.66% or 216.10 points to close at 6115.55.

The Indian rupee appreciated 2.54%, or Rs 1.61, against the dollar, the second biggest rise in absolute terms, to close at 61.78.

The US Federal Open Market Committee on Wednesday decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. The committee said that the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market.

The assurance by Fed to continue with its accomodative policy and maintain status quo on QE3 (quantitative easing) programme led to re-emergence of risk-on environment that saw foreign investors pumping in money into emerging markets like India and Indonesia that had seen their currencies depreciate the most on fears of cut in Fed’s stimulus.

Foreign institutional investors (FIIs) on Wednesday purchased shares worth Rs 3,544 crore (provisional data) and have now pumped in over Rs 11,350 crore in the last 11 sessions on the back of a 9% recovery in the rupee.

Anand Tandon, CEO at JRG Securities, says that the current euphoria has more or less played out and markets are unlikely to go any further than the old highs.
“Nothing has changed substantially for the Indian markets as inflation continues to remain high and economic outlook is unlikely to change in a hurry. The market valuations are not expensive; but then, corporate earnings expectations, too, have fallen from 15% to 7-8% and are now lower than the domestic lending rates,” said Tandon.

The market breadth was quite positive with all the sectoral indices barring IT, ending with gains of 1-7%. 

Saurabh Mukherjea, CEO, institutional equities at Ambit Capital, feels that though there’s still upside left for the markets, probably in single digits, one should remain cautious at current levels as the Fed tapering is a matter of ‘when’, and not ‘if’. “We have been advising our clients not to get too exuberant as the domestic growth environment is likely to remain hostile given the shift in policy priorities amid difficult macroeconomic conditions. At the current juncture, one needs to focus on quality cyclical and small-cap stocks,” he said. Tandon says that the markets and the rupee are likely to trade around current levels till any further global shock.