Even though the headwinds for the market remain at the front, Indian equities have been witnessing healthy gains this week.
The possibility of a recession, inflation and aggressive rate hikes by the central banks are keeping the sentiment fragile and any negative news flow about geopolitical tensions can puncture the nascent market rally. Nevertheless, the market is witnessing decent gains. Sensex has clocked a gain of 1270 points this week so far.
What is comforting the market? The fall in crude oil and other commodity prices seems to have boosted the mood of the market. Besides, RBI's efforts to arrest the fall of the rupee and improvement in macroeconomic indicators are also supporting the market.
Inflation worries ebb: A sharp correction in crude oil prices have underpinned the market sentiment. Fears of a global recession hit the crude oil prices. Brent Crude traded near $100 a barrel mark.
"The sharp correction in crude, commodities like metals, and the declining trend in edible oil indicate that inflation will come under control soon. Taking cues from these indicators the bulls have again turned buyers and the near-term structure of the market has turned clearly bullish now," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
RBI's initiatives to help the rupee underpin market sentiment: The Indian currency is near an all-time low. However, the fresh steps, taken by the Reserve Bank of India (RBI) to boost foreign exchange inflows and arrest the rupee’s slide against the dollar, are positive for the market.
As per a Mint report, RBI's measures include doubling the annual overseas borrowing limits for companies to $1.5 billion and temporarily abolishing interest-rate caps for banks to attract deposits from non-resident Indians.
"The RBI’s measures come on the back of substantial dollar shortage and aimed at shoring up the capital flows into India. While it is difficult to ascertain the quantum of flows, the measures are attractive for banks and FPIs. While India’s macro situation is better than in the 2013 period, these measures would alleviate and preempt the adverse impact on the external sector balance. The RBI is clearly aiming at softening the depreciation bias and capping the speculative moves against the rupee," said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.
"The crash in commodities and RBI's latest initiatives to increase foreign currency inflows have the potential to arrest further depreciation in the rupee. This means FIIs are unlikely to sell more. This is positive for markets," said Vijayakumar.
Improving macro: Some economic indicators, such as housing and auto sales numbers, are indicating India's economic recovery is on track.
A Mint report, quoting analysts and fund managers, said "India may be better placed than many other economies to navigate a recession in the US and Europe as it would cool red-hot oil and commodity prices and help avert further interest rate hikes."
"Leading indicators like demand for housing, autos, particularly passenger and commercial vehicles, certain discretionary items like jewellery etc., reflect a robust economic recovery in India," said Vijayakumar.
Mitul Shah, Head of Research at Reliance Securities underscored that the Indian market has outperformed the global market for the past few days, with the drastic recovery in the monsoon deficit during the last 3-4 days, which led to a surplus monsoon now.
"Crop sowing has also picked up its pace which should mitigate food inflation to some extent and is likely to benefit India's economic outlook in the coming weeks. Most importantly the prices of crude oil dropping below $100/barrel is a key positive for the Indian economy in terms of current deficit and currency movement benefitting equity," said Shah.
Attractive valuations: The recent correction in the Indian market has made the valuations of many stocks attractive. As per an Economic Times report, nearly half of the Nifty50 Index constituents are trading below their long-term valuation multiples and about two-thirds of Nifty50 sectors trade at a discount to historical averages.
At the end of June, Nifty50 traded at a 12-month forward P/E of 17.6 times, which was at a 9 per cent discount to its long-term average. On a trailing basis, Nifty50 at 20.7 times traded at a 3 per cent discount to its LPA of 21.2 times.
Has the market hit the bottom?
It is early to say that we have hit the bottom and the market will continue to rally from here on.
"We believe the current rally in the market is a short-term rally and will continue over the near term. We expect the markets to remain volatile for the next couple of months as rising inflationary pressures and concerns about the global recession along with geopolitical issues will continue to impact overall sentiments," said Shah.
Shah highlighted that the minutes released by the US Fed added concerns that the central bank would aggressively raise interest rates to tame inflation, thus monetary tightening and higher interest rates are here to stay for some more time.
"The global macroeconomic trends, movement in crude oil prices and FII activity will dictate the markets ahead of the start of quarterly earnings season. However, we remain positive on Indian equities from a long-term perspective as India is better placed compared to many developed nations at this juncture. We expect a strong bounce back in the market in the second half of FY23," said Shah.
Deepak Jasani, Head of Retail Research, HDFC securities is of the view that the markets globally are seeing a bounce over the past few sessions aided by a sharp fall in commodity prices, and economic data that could relieve the pressure on central banks to tighten monetary policies. Also, attractive valuations have enticed fence sitters.
"The negative triggers that led to the sharp fall since April 2022 have still not totally gone out of the way and hence it is difficult to state that this is a fresh bull market rally," said Jasani.
Yash Gupta, Equity Research Analyst, Angel One pointed out in the last nine months, we have seen more than ₹2500 crore sold from FIIs in the Indian market due to rate hikes in the US market and expectations of a slowdown in emerging markets.
"In the last 2-3 days we have seen a slowing down of selling from FIIs and DIIs continue to buy. Currently, the valuations are in the lower range of the last 5-year historical average, we suggest long-term investors should look at this as an opportunity," said Gupta.
On the technical front, Santosh Meena, Head of Research, Swastika Investmart, observed that the selling momentum by FIIs has come down significantly while they are turning their positions to bullish in the F&O market.
"The low made on the first day of a new series act as strong support therefore 15,500 has become a sacrosanct support level. On the upside, 16,200 is an immediate target while the possibility of 16,500/16,800 can't be ruled out in the July series. A sharp fall in commodity prices is easing inflation concerns which is acting as a major tailwind for the Indian market whereas our fundamentals are much better than many global peers," said Meena.
Disclaimer: The views and recommendations made above are those of the individual analysts and broking firms and not of MintGenie.
