FPI flows take Sensex to new high

Mumbai: Unabated foreign investor purchases and lower-than-expected contraction in the Indian economy are keeping the stock market humming. Key indices closed at record highs on Tuesday but simmering consumer inflation and rich valuations are keeping market participants on the edge. While investors have taken note of the advancing bond yields in the past month on account of rising prices, they will weigh the Reserve Bank of India’s comments on inflation to determine the road ahead.

For now, investors see little threat to the rally with foreign funds extending their purchases of Indian equities to December after pumping a record Rs 69,000 crore in November. On Tuesday, they bought shares worth Rs 3,242 crore, helping the Sensex climb over 500 points, or 1.15 per cent, to a record close of 44,655.44. The Nifty jumped 140 points, or 1.1 per cent, to all-time closing highs of 13,109.05. The Volatility Index shed 0.2 per cent to 20.18, showing traders see little risks to the market for now.

“It is largely liquidity and lack of any negative triggers which are keeping the markets in positive terrain at present,” said Piyush Garg, CIO, ICICI Securities.

Traders are watching the Nifty’s all-time high of 13,145 of November 25, which could be a hurdle.

“We need to closely monitor the price action near the high as it will decide the further course of action for the index. Failure to sustain near the high would push the index back into the consolidation mode,” said Gaurav Ratnaparkhi, senior technical analyst at Sharekhan by BNP Paribas. “Near-term support for Nifty is at 13,000.”

Friday’s GDP data showed that the Indian economy contracted 7.5 per cent in the September quarter, which was lower than what the Street expected. With the rollout of vaccines against Covid-19 expected soon, investors are hoping that there could be a rebound in economic growth next year.

Money managers said the RBI is likely to keep the benchmark interest rates unchanged in its next monetary policy review announcement on Thursday in light of heightened retail inflation, which is above the central bank’s comfort level.

“Inflation is a monitorable and if it doesn’t cool down in the next six months then RBI stance could change,” said Vinit Sambre, head of equities at DSP Investment Managers. For Sambre, valuation is a more immediate concern. “Valuation is at the higher end of the spectrum and market’s up-move has surpassed recovery,” he said.

Nifty’s 12-month forward PE ratio at 21.4 times is at an all-time high.

“Inflation in consumer staples is rising and on top of that if there is spending then inflation could rise quickly,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies. “Arrival of vaccines could boost consumption stocks as people have saved up during the pandemic.”