Sensex conquers new peak as sliding inflation sparks rate cut hopes

MUMBAI: Shares hit record highs on Thursday with Sensex conquering the 32,000-level as a drop in June retail inflation data sparked hopes of a rate cut by the Reserve Bank of India and US Federal Reserve chair Janet Yellen indicated monetary policy tightening will be gradual.

Data released post market hours on Wednesday showed consumer price index-based inflation fell to a record low of 1.5% in June while growth in industrial production fell to a three-month low in May. Elsewhere in world markets, Wall Street’s optimism after Yellen’s comments late on Wednesday spilled over to Asian markets on Thursday with equity markets gaining as much as 1.2%.

The Sensex climbed 232.6 points, or 0.7%, to close at 32,037.38 after hitting a lifetime high of 32091.52 during the day. The Nifty fell short of the 9,900-mark but nevertheless scaled a new peak of 9,897.25 before ending at 9,891.70, up 75.60 points, or 0.8%. Both indices ended at their highest-ever closing levels.

Technical analysts are betting that the Nifty will cross the psychologically crucial 10,000-mark this month.



“There could be hiccups on the way but it looks like the Nifty will cross 10,000 in the July series,” said Hemant Nahata, derivatives analyst at IIFL Wealth. Derivatives data is also pointing in that direction. The 10,000-strike holds the highest open interest among Nifty call options in the July series while among put options, the 9,600-strike holds the highest open interest, indicating support for the index at that level.

Barring the oil and gas index, all sector indices on the BSE ended in the green, led by the BSE Fast Moving Consumer Goods Index which rose 1.6% and the BSE Capital Goods Index which gained 1%.

The Bank Nifty ended up 0.8% at 23,888.65 -- also a record high. Foreign portfolio investors net sold shares worth Rs 59 crore and domestic institutional investors bought shares worth Rs 279 crore on Thursday. “The market is moving up on expectations of rate cut in the August policy after lower inflation data and supported by short covering triggered by the Sebi circular,” said Nilesh Shah, managing director at Kotak Mahindra Mutual Fund.

According to some market experts, a rate cut has become a given after Wednesday’s retail inflation data, and also factored in by the market.

“The rate cut has been factored in. The G-Sec yield has come down below 6.5%. It remains to be seen whether it is announced in the August or October policy,” said Sunil Singhania, CIO-equity investments at Reliance Mutual Fund. With Thursday’s gains, Nifty is up 20.8% for the year while the Sensex is up 20.3%.

In July so far, Nifty and Sensex have gained close to 4%, largely spurred by the Securities and Exchange Board of India putting in place restrictions on foreign portfolio investors from issuing participatory notes where the underlying asset is a derivative product. At 23.54 times trailing price-to-earnings multiple, Indian markets are trading at their highest multiple in seven years. This has spurred concern over how far the market rally can stretch.

Vinit Sambre, fund manager, DSP Blackrock said investors are pouring money in equities as India’s macro-economic situation improves and other asset classes lag behind. But a correction is warranted given high valuations.

“Valuations are skewed in favour of companies performing well. One needs some healthy price points to enter these companies. So, a correction is warranted but it is not certain when it will happen as money flow (from mutual funds) is strong,” he said.