Fleeting euphoria

Markets have given a huge thumbs up to results of five state assemblies in the country, especially where BJP has formed a government, never mind the means it adopted to hijack power in Manipur and Goa. Both the Sensex and the broader Nifty have recorded sound gains this week.

The 30-share BSE index Thursday added 188 points to close at a 2-year high of 29,586 and the Nifty hit a new peak of 9,154 driven by a flush of foreign capital. However, what takes the cake is the sharp appreciation of the rupee against the US dollar.

Continued foreign inflows have sparked a rally in the Indian rupee (INR) which saw a surge of 78 points against greenbacks in one single day Tuesday, a one-and-a-half year record. It continued its stellar run to finish at a fresh 16-month high of 65.81 Wednesday as exporters aggressively offloaded the US currency ahead of the Fed meet outcome.

The forebodings that the US Fed may up the interest rates did not seem to be bothering foreign investors. The rupee closed at 65.41, up 0.43 per cent from its previous close of 65.82. The rupee has gained a cumulative 119 paise against dollar over last four trading seasons and going by the bullish sentiments at play, there seems to be still a lot of upside in the market.

That the BJP is set to get four more states under its belt means that its position in the Rajya Sabha will be strengthened and the party may not have to depend on regional parties to pass key bills. This may have worked positively on investors.

As the BJP does not have enough numbers in RS, it could not push through key legislations. Massive capital inflows on hopes of more reform measures have caused the rupee’s biggest rally since 2015. The domestic currency has risen nearly 3 per cent since the beginning of the year.

However, the euphoria over the bullish markets triggered by a BJP win may not last long. In the absence of solid growth numbers what with subdued Q3 results, fundamentals required to underpin a market rally are missing.

A large part of the market bonhomie is driven by sentiments only. The macroeconomic scenario is still what it used to be a year back. The US Fed, as expected, has raised the key interest rates by 25 basis points and continued to project two more increases this year, signaling more vigilance.

One basis point is one-hundredth of a percentage point. The Fed move could mark the beginning of a significant shift in the global interest rate environment. Foreign fund houses are likely to pull out money from emerging markets and India cannot stay immune from it. There is still an element of uncertainty on how the growth numbers will finally pan out.

Wholesale inflation soared to a 39-month high of 6.55 per cent in February and retail inflation inched up to 3.65 per cent due to rise in food and fuel prices courtesy demonetisation.

Rising inflation is likely to refrain the Reserve Bank of India from cutting interest rates in its next monetary policy review April 6. In its February policy review, the central bank had held to rates anticipating a pick-up in inflation numbers.

In hindsight, the central bank’s assumptions on growth-inflation dynamics seem to be correct. With summer approaching, vegetable prices will be even more under pressure. Along with this, hardening of commodity, crude prices and inflationary impact of GST would mean inflation worries would remain high in the remaining part of the current year, dimming the hopes of a rate cut.

In such a scenario, foreign investors in emerging markets will pull out money, causing stocks to underperform.

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