Indices post record highs after Fed’s dovish stance

Sensex up 8% in August, making India best-performing major market globally

India’s benchmark indices hit record highs on Monday, along with a rally in global markets, as dovish comments from US Federal Reserve Chairman Jerome Powell boosted risk appetite and pushed the dollar to near two-week lows.

The Sensex closed at 56,890, with a gain of 765 points, or 1.36 per cent — the most since August 3 — while the Nifty50 jumped 226 points, or 1.35 per cent, to close at 16,931. The market capitalisation of Bselisted firms climbed to ~247 trillion ($3.37 trillion).

US’ S&P 500 and Nasdaq indices, too, hit record highs in early trade on Monday.

At the Fed’s annual Jackson Hole conference on Friday, Powell indicated that the US central bank was likely to begin reducing its monthly bond purchases this year but was in no rush to hike interest rates. Investors were keenly awaiting the meeting to get clues on the timing of the central bank’s unwinding of the stimulus programme — announced in the wake of the Covid-19 pandemic — which has resulted in unprecedented gains in global equities, with India being a major beneficiary, over the past 17 months.

The Fed has expanded its balance sheet to nearly $8.4 trillion, nearly double its size in March 2020.

“The most notable feature of the speech was that Chair Powell managed to delink tapering and liftoff by noting that the Fed has ‘articulated a different and substantially more stringent test’ for liftoff,” Nomura strategists, including Chetan Seth, wrote in a note. “This was possibly the reason behind stronger US stocks (particularly cyclicals) post Powell’s comments despite him confirming an inevitable tapering.” US Treasury yields slipped to around 1.3 per cent as Powell didn’t give a definite timeline for scaling back its bond purchases.

“Tapering means less of the QE (quantitative easing) bond purchase programme, which has been pursued post the financial crisis. But in case of rate hikes, it is still some distance away and this means that hikes are not imminent as there is still much ground to cover before the economy hits full employment,” said a note by Care Ratings.

The Sensex has rallied more than 8 per cent in August, making India the best-performing major market globally. Market experts said these gains are mainly underpinned by domestic flows.

On Monday, both foreign portfolio investors (FPIS) as well as domestic institutional investors (DIIS) were net-buyers. FPIS bought shares worth ~1,203 crore, while DIIS were buyers to the tune of ~689 crore. “We had had 12 months of really strong flows from foreign investors until June 2021. But this quarter, we have seen softness in FPI flows. But domestic flows — household savings moving into equities — are really holding up the markets. Our view is that since we have seen India perform really strong despite not delivering the kind of earnings growth that other emerging markets have given, there could be some period of consolidation,” said Sunil Tirumalai, equity strategist, UBS Securities. The brokerage has a 12-month Nifty target of 16,000, indicating some correction from the current levels.

FPIS have been net-sellers to the tune of $1.2 billion so far this quarter, even as they have pumped in $500 million this month.

Metals and energy stocks led the market charge on Monday, while technology stocks saw some profit-taking. The top Sensex gainers were Airtel, Axis Bank and Tata Steel — each posting more than 4 per cent gain. Tech Mahindra, Infosys, TCS, and Nestle India were the only losing stocks on the 30-share index. The broader market outperformed the large caps, with the Nifty Midcap 100 index gaining nearly 2 per cent.

With inputs from Bloomberg