The stock markets of India started on a sunny note on Thursday, September 3 with Sensex and Nifty 50 climbing after three consecutive losses. And the Indian currency appreciated sharply against the dollar and stocks climbed higher overall as investors were encouraged by better liquidity conditions, huge foreign-currency flows, global market gains and buying on banking stocks. But high crude oil prices and continuing geopolitical uncertainty were still considered to be the major risks in the market.
At the opening bell the BSE Sensex gained 154.60 points, or 0.20%, to 76,724.95 and NSE Nifty 50 rose 83.50 points, or 0.35% to 23,997.95. The Bank Nifty also had a strong start to the session with 325.85 points, or 0.57%, higher at 57,497.85. Investors’ mood improved after three sessions of low interest rate.
Rupee strength is a major market positive
One huge factor that has helped the market is the sharp rise in the Indian rupee. The currency opened at ₹94.30 against the US dollar, up 67 paise from Wednesday’s close at ₹94.97, the highest level in roughly two months.
The Reserve Bank of India said the FCNR(B) route attracted more than $127 billion, far above market expectations of $90 billion. Including external commercial borrowings and overseas foreign-currency borrowings, the total inflows were around $136 billion. A large inflow is a boon for India's foreign exchange position and gives the RBI much more freedom to control the volatility in the currency market.
The stronger rupee can also affect equity markets as it will lower inflation fears in imported products and the cost of dollar-denominated commodities and liabilities. For companies that import raw materials or have significant foreign-currency exposure, stability of the currency can be helpful for business. Exporters have a different scenario for the domestic currency if the domestic currency is strong but exporters are not happy.
Banking Stocks lead the Recovery
Banking stocks were one of the main drivers of Thursday’s equity-market revival. The Bank Nifty jumped more than half a percent, while financial stocks were still in focus. Market reports indicated banks, private lenders and state-owned banks were some of the best performing sectors.
The massive foreign-currency mobilisation by Indian banks has brought another layer of banking-sector story. Investors are watching how the additional liquidity and foreign-currency resources will affect banks' balance sheets and profitability. A stronger banking stock can also have an outsized impact on benchmark indices because financial companies carry significant weight on major Indian equity indices.
Somewhere else, the market sentiment was also positive. Small- and mid-cap stocks participated in the recovery and buying interest was not limited to large-cap shares. But investors were still selective with some sectors still under selling pressure.
Additional Support from the Global markets
Global market signals also helped in the good mood. US stocks were also up in the last day, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite collectively up. Asian markets were mixed but they did see a few major indices climbing and Indian stocks were up at the start.
A short-term easing in US bond yields also helped to lift global risk sentiment. So low yields can at least temporarily ease pressure on emerging-market assets and make some investors reassess their long-term stock markets and other risk-sensitive markets. Still, fears of US monetary policy remain a major worry for global investors.
Crude Oil and Geopolitical Risks remain
However, the market rally has not been without challenges. As relations between U.S. and Iran have been on the rise, crude oil prices have been on the rise, and it is not only the concern of import-dependent countries like India. Higher crude prices could increase India’s import bill, put pressure on the trade balance and contribute to inflationary pressure.
Brent crude had risen sharply during the week as geopolitical tensions deepened. That creates a complex environment for the rupee and Indian equities as stronger foreign-currency inflows are currently supporting the currency while expensive oil could work in the opposite direction.
For investors this morning’s opening is simply a recovery not a sign that market volatility is gone. This recovery is the result of three consecutive losses and analysts will be watching global bond yields, crude prices, currency movement, foreign flows and geopolitical developments.
Even so, the combination of a stronger rupee, huge foreign-currency inflows, better global stock sentiment and buying of banking stocks helped Indian markets begin September 3 on a positive note.
The Nifty 50 was close to 24,000 and the Sensex recovered from its recent slide. Investors would have to do a lot more to make sure the gains last in the trading session given that oil prices are up, global risk sentiment is firm and the situation in currency and monetary markets is also improving.
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