Markets shrug off inflation worries, gallop 2.54%; DIIs, retail investors big buyers

Shrugging off inflation woes, the equity markets rallied smartly on Tuesday with the Sensex putting on 1,344.63 points and racing all the way up to 54,318.47 at close.

Tuesday’s gain was the best in a single-day for both gauges since February 15, a day on which the rupee closed at a record low of 77.57 against the dollar.

Shrugging off inflation woes, the equity markets rallied smartly on Tuesday with the Sensex putting on 1,344.63 points and racing all the way up to 54,318.47 at close. The broader Nifty too surged 417 points, or 2.54%, to end the session at 16,259.30. Investor wealth appreciated by Rs 12 trillion.

The breadth of the rally, with the Nifty Midcap and Smallcap indices gaining 2.7% and 3.4%, respectively, was somewhat surprising given the April wholesale inflation print of 15%.

Tuesday’s gain was the best in a single-day for both gauges since February 15, a day on which the rupee closed at a record low of 77.57 against the dollar. Experts said the easing Covid-19 related restrictions in China helped perk up the sentiment.

The Indian markets have been remarkably resilient despite heavy selling by Foreign Portfolio Investors (FPIs). Between January and now, they have sold $20.1 billion worth of equities including $282.65 million on Tuesday. Since October, they have pulled out $25.7 billion. Domestic institutions have been big buyers as have retail investors. On Tuesday, local domestic institutional investors bought shares worth $295.8 million, provisional data on exchanges showed.

However, strategists remain cautious. BofA Securities has lowered its target for the Nifty50 to 16,000 from 17,000, citing faster- than-expected policy tightening and higher inflation. “Any easing of currently volatile crude prices, turnaround in FII flows & bottoming of INR could be an upside risk in our view, while global inflation prints coming ahead of estimates & resulting in faster than anticipated rate hikes is the key downside risk,” the brokerage opined.

Against this negative backdrop, BofA sees the Nifty’s valuation multiple shrinking to its LTA (long-term average) of 15.8x, resulting in the index moving to 13,700 implying a 15% downside from current levels. Bloomberg data shows the Nifty currently trades at 18 times its one-year forward earnings estimates.

Milind Muchhala, Executive Director, Julius Baer India, believes the markets will continue to be influenced by incremental news flows related to central bank actions, especially the US Fed, and inflationary trends. “In the short-term, there could be some technical pull-backs considering the excess pessimism that seems to be floating around and the oversold conditions that we are into,” he said. Among sectoral indices, the Nifty Metal index gained the most rising 6.9%, followed by Oil & Gas and Media, each gaining over 3%.

Of the 3,462 stocks traded on the BSE, 2,607 scrips gained while 737 ended in the red. However, the breadth for the month so far has slipped to 0.72, after advances outnumbering in both March and April. The combined market capitalisation of BSE listed firms stood at 255.55 trillion as of Tuesday’s close. Tuesday’s surge has also narrowed Sensex’ year-to-date loss to 6.8% from 9.4% seen in last week.

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