Will This Stock Market Rally Sustain?

Thu, 31 Mar Pre-Open

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The S&P BSE Sensex has rallied over 9% from the very lows seen in the month of February. The index went as low as 22,951 in February. At the time of writing, the index stands at 25,137. Now, this is a sharp upward movement within a small period of time. The reason for the surge can very well be attributed to the heavy buying by the foreign institutional investors (FII). The FII flow in this month has been the highest in a single month investment since February 2013. However, will this rally sustain?

The FII flows could have possibly risen on two counts.

First being, US Federal Reserve (US Fed) keeping interest rates steady in its last review meeting. The chairman indicated the likelihood of just two hikes going forward in this calendar year as compared to the expectation of four. An increase in the rates by the US Fed is a negative for India. Reason being, the flow of money coming to India from the developed nations would come to a halt. As yields on US Treasuries increase owing to a hike in interest rates, people would prefer to park their money in US Treasuries. They are perceived to be a safe haven investment as compared to equities in the emerging markets. Thus, a decision of steady interest rates by Fed led to an increase in the FII flow in the country.

Second being, the expectation that the Reserve Bank of India (RBI) might cut key rates in the next Monetary Policy review on April 5. The Union Budget for 2016-17 stuck to the earlier fiscal deficit target of 3.5% of gross domestic product for FY17. However, Vivek Kaul in his recent article has raised concerns on the government adhering to the fiscal deficit target. Click here to read this interesting piece.

However, the ground realities have not changed. Companies have missed their profit estimates. Earnings have not improved significantly. Key indicators indicating a pick-up in the growth scenario are suppressed. Indicators such as two-wheeler sales, bank loan growth, electricity consumption and corporate earnings have not showed any signs of improvement, despite India being one of the fastest growing countries in the world.

Typically, markets tend to be driven by sentiments in the short run, which explains the volatile swings. However, in the long run, stock markets catch up with the fundamentals. For the markets to rally in the long run, corporate earnings need to improve substantially. Unless that happens, it is unlikely that the rally would sustain.

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