How long will the rally in Sensex and Nifty continue? The mix of Modi, Rajan, Yellen and Draghi is acting as a powerful combination to propel the indices higher. Other factors include expectations of corporate revenue and earnings growth and falling risk aversion globally.
The risk to the markets is in the form of the Eurozone falling under the weight of deflation, no growth, high unemployment and high debt. The Euro weakening by over 5% against the USD to trend below Eur 1.30 is positive for markets as of now as it reflects ECB liquidity driving asset prices. However a sustained fall in the Euro value would lead to speculation of the Eurozone economy falling too deep into a rut and that could lead to global market volatility.
Geo political tensions in Ukraine, Iraq and Gaza can spread leading to market volatility. China struggling with over investments, bad loans and property price bubbles is also a threat to the market rally. However, risks are not rising to the fore at present and may rise at higher levels of markets. Read our analysis, Follow these two factors for future market trends.
The Sensex and Nifty closed at record highs of 27332 and 8173 respectively on the 8th of September 2014. The record closing of the indices have been going on consistently for a while. Read our Equity Market Analysis for reports on Sensex and Nifty. The government would typically take credit for the wealth created by an equity market rally and in this case, the rally took off after Narendra Modi was elected the PM in May 2014. The coincidence is too strong for Modi not taking credit for the rally, even though many of the factors driving the rally such as fall in fiscal and current account deficit, fall in inflation and fall in fuel subsidy was initiated by the FM of the UPA government, P. Chidambaram.
The fact is that Chidambaram was forced to adopt measures to improve the country’s macro after the Indian Rupee (INR) tanked by over 25% to all time lows against the USD in August 2013. Gold imports were cut to lower current account deficit, expenditure was cut to lower fiscal deficit and fuel prices were raised to lower the subsidy bill.
Dr. Raghuram Rajan who took office as the RBI Governor in August 2013, raised policy rates and adopted a formal inflation target to lower inflation expectations.
The budget presented by the Modi government in July 2014, largely continued with the deficit targets set by Chidambaram in the vote on account in February 2014.
Hence, Modi government, apart for providing stability at the centre and continuing with strengthening the macro economic framework started by Chidambaram, did not have to do much to lead the market rally.
The Sensex and Nifty rally is to a large extent driven by the Fed and ECB chiefs, Janet Yellen and Mario Draghi. Yellen guided the markets towards an uneventful taper of asset purchases and is continuing to guide the markets towards rate hikes starting 2015.
Draghi is emerging as the provider of liquidity for the markets with policy rates at record lows, LTROs (Long Term Refinance Operations) and asset purchases. Read our analysis Draghi could lead the next rally in Sensex, Nifty, INR and 8.40% 2024 GOI.
FIIs have pumped in USD 12 billion in INR bonds and USD 9.4 billion in equities since April 2014 on the back of Fed and ECB actions.