Why Sensex is Rising

The recent performance of the Sensex, India's leading stock market index, has been exceptional, as it continues to break records with benchmark indices consistently smashing one record after another.

Despite the inherent volatility and unpredictability of the stock market, the index has showcased remarkable resilience, gaining 1.8% in the past five days.

As a result of this, the market capitalisation of companies listed on the Bombay Stock Exchange (BSE) have also experienced an unprecedented surge, currently standing at a staggering Rs 298.57 trillion (tn) (US$ 3.65 tn).

Let's find out what is driving the rally.

#1 FPI Inflow

The surge in foreign portfolio investor (FPI) inflows into the Indian market has played a pivotal role in driving the Sensex to record highs.

In June, India experienced a significant boost in foreign portfolio investors' (FPIs) inflows, marking it the strongest month in the past ten months.

FPIs injected a substantial amount of Rs 471.5 bn into the Indian equities, signifying their confidence in the country's improving macroeconomic fundamentals. Notably, this is the fourth consecutive month in which FPIs have ended as net buyers in domestic stocks.

To provide some context, FPIs made investments of Rs 438.4 bn in May, Rs 116.3 bn in April, and Rs 79.4 bn in March. In contrast, they withdrew Rs 52.9 bn in February and Rs 288.5 bn in January. Overall, FPIs have injected Rs 764.1 bn into the Indian market during the first half of 2023.

Additionally, FPIs also allocated around Rs 92 bn into the debt market in June.

The sustained flow of FPIs into India can be attributed to their shift in strategy from Buy China, Sell India to Buy India, Sell China. This change is fueled by concerns over China's economic recovery, leading foreign investors to divert their attention away from the Chinese market.

However, it is worth mentioning that FPIs have become more cautious following recent comments made by the US Federal Reserve. These remarks may have an impact on their future investment decisions.

#2 Upbeat global market

The rally was further fueled by optimistic global stock market trends.

This surge in market sentiment can be attributed to several factors, including robust economic growth in the United States and China and the continuation of low-interest rates in developed markets.

In the United States, recent economic data has surpassed expectations, indicating a strong and resilient economy. New home purchases have seen a significant annual increase, while durable goods orders have exceeded estimates.

Furthermore, consumer confidence has reached its highest level since the beginning of 2022. These positive indicators have shifted the outlook away from a potential recession, contributing to the positive sentiment in global markets.

China, the world's second-largest economy, has experienced a slight contraction in its manufacturing activity for three consecutive months. However, the pace of contraction has slowed, prompting policymakers to consider implementing stimulus measures to boost weak demand.

Although the second quarter has not maintained the same level of momentum as the first, driven by robust services consumption, there are expectations for further stimulus measures to support the economy.

It is worth noting that China's services sector activity in June recorded its weakest reading since the easing of COVID-related restrictions, signaling some challenges in the recovery process.

Considering the positive economic growth in the US and the gradual recovery in China, the overall optimistic global market sentiment has played a crucial role in driving the Sensex rally in India.

#3 Sectoral gains

Sectoral gains have also played a significant role in the recent rise of the Indian market.

In the auto sector, companies such as Tata Motors and Mahindra & Mahindra have been leading the way with their strong performance.

The financial sector has also been a key contributor to the market's upward momentum. The rally in HDFC twin shares, driven by the merger, has been instrumental in boosting the sector. Non-Banking Financial Corporations (NBFCs) have emerged as crucial providers of financing for a wide range of individuals and businesses, including small and medium enterprises. Their role in facilitating access to capital has supported economic growth and investor confidence in the financial sector.

Additionally, the FMCG sector has exhibited strong performance, with companies like Hindustan Unilever and Nestle India posting robust earnings.

The FMCG sector's resilience and ability to deliver consistent growth have attracted investors, contributing to positive market sentiment.

#4 Strong Corporate earnings

The expectation of strong corporate earnings in India is another factor that has contributed to the Sensex rally. The consistent growth in earnings, driven by factors such as strong demand, rising prices, and cost-cutting measures, has generated positive market sentiment and attracted investors.

Anticipated strong demand in various sectors indicates increased sales and revenue for companies, which translates into improved earnings.

Further, rising prices have also played a role in bolstering corporate earnings. Companies have been able to pass on increased costs to consumers, leading to improved profit margins.

Sectors such as FMCG have successfully managed input cost inflation through price hikes, contributing to overall earnings growth.

Additionally, cost-cutting measures implemented by companies have positively impacted their profitability. Streamlining operations, optimising resource allocation, and improving operational efficiency have helped reduce costs and enhance earnings.

Overall, the expectation of strong corporate earnings has heightened investor confidence and attracted more participation in the market, leading to a Sensex rally.

To conclude

Going forward, Indian benchmark indices are poised for favourable prospects, supported by strong global and domestic cues.

However, it is crucial to acknowledge the inherent volatility of markets. It is important to remember that the stock market is cyclical. After every boom, there is a possibility of a bear phase.

Therefore, investors should exercise caution and adopt a diligent approach when selecting stocks.

Evaluating company fundamentals, such as financial performance, growth prospects, and competitive positioning, is essential. Assessing the management quality and their ability to navigate challenges is also crucial.

Furthermore, understanding the situation of the industry in which a company operates and the company's position within that industry is important. This helps gauge the potential risks and opportunities associated with the investment.

And to know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...