Mumbai, Dec. 5: Stocks surged and the rupee leapt to a five-month high as the markets turned ebullient after exit polls projected a strong showing for the BJP in the Assembly polls in four states ahead of next year’s general elections.
It is almost the first time in several months that the domestic bourses were able to shake off looming concerns over the timing of the US Federal Reserve’s decision to wind down its $85-billion-a-month bond buying programme that had been designed to stimulate the US economy.
The BSE Sensex rose 1.2 per cent, or 249.10 points, to end at 20957.81, marking its highest close since November 5. The index is not far from a record high of 21321.53 hit on November 3.
The broader Nifty rose 1.3 per cent, or 80.15 points, to end at 6241.10, after earlier rising as much as 2.3 per cent to hit 6300.55.
The Nifty is also hovering close to its record 6357.10 hit on January 8, 2010.
The rupee also rose to as high as 61.52 against the dollar, its strongest level since October 31. It closed at 61.75 compared with its 62.06 close on Wednesday, giving up some gains on dollar demand from oil refiners.
The markets have reacted with fervour to the prospect of the BJP’s return to power in the belief that it will be more business-friendly and push sensible reforms.
“Based on our discussions with investors, markets are positively inclined towards Narendra Modi led BJP and less so towards Congress, despite some course correction in policies recently by the latter,” UBS said in a 2014 outlook note to clients
“Although the markets opened on a higher note, actual buying is still missing; the rally was sentiment-driven and sellers stayed away,” said Shrikant Chouhan, head (technical research) of Kotak Securities. “Market players (especially FIIs) are betting on the opposition party BJP gaining majority in the four states. If that holds true then on Monday we think the markets will discount the outcome of the general elections to be held in May/June 2014. However, technically currency is poised for a reversal from 61.50 levels.”
The truth of Chouhan’s assertion will probably be tested tomorrow as markets wrestle with the surprise announcement from Washington late tonight that the US economy had expanded 3.6 per cent in the third quarter, making it the fastest increase in 18 months. The pundits were anticipating projected US GDP growth at 3.2 per cent.
The surge in the US economy might ignite concerns over the Fed taper all over again and cause markets to stumble once again.
But this causal link between a strong US GDP growth and a Fed taper may break down because of the fact that the quarter has seen the largest build-up in inventories since 1998. An inventory build-up could lead to a sharp slowdown in the fourth quarter as companies struggle to winnow their stockpiles. The mavens believe the Fed may still wait to watch how things pan out over the next quarter before moderating its bond-buying binge.
This argument is also buttressed by the fact that growth in consumer spending in the US was trimmed to 1.4 per cent from 1.5 per cent.
The counterplay of factors posits another period of volatility for markets. “The markets are likely to go wild on either side,” said Chouhan. “If the Nifty opens down on Monday, then it will accelerate southwards and even challenge the 5900 levels. On the other side, if the actual (election) results come according to expectations, then the market will open above the all-time high of 6357 and may move to 6500 on back of fresh buying.”
ICICI Bank Ltd surged 6.5 per cent, making its biggest advance in three months. Axis Bank also spurted to a five-week high. Larsen & Toubro Ltd headed for the highest close in 11 months, sending the S&P BSE capital goods index to its highest level in six months.
Adani Enterprises Ltd climbed to the highest level since January 22, leading a rally among companies based in Gujarat, the home state of Narendra Modi.
Meanwhile, the Reserve Bank of India said it would soon introduce cash-settled interest rate futures on 10-year government bonds.
The banking regulator has also permitted exchanges to launch these derivatives in other smaller tenor securities in the future. The RBI has twice attempted to launch the interest rate futures (IRFs), in 2003 and 2009, but both attempts failed largely because of faulty product design.