Mumbai : Short covering, some relief in selling by foreign investors and better global cues saw a strong rise in the stocks on Tuesday. However, analysts believe that the rally is going to be short-lived, as higher inflation, rising crude oil prices and a weaker rupee have put pressure on corporate earnings.
Sensex and Nifty ended the day with gains of 2.54% and 2.63%, rising 1,344.63 points and 417 points to end at 54,318.47 and 16,259.30, respectively. Gains were supported by metals, oil & gas and a few other sectors, with the BSE Metal index rising 7.62%. Others such as basic materials, oil and gas, energy, telecommunications, industries and capital goods indices saw gains of over 3%.
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Shrikant Chauhan, Head of Equity Research (Retail) at Kotak Securities Ltd, said markets witnessed a sharp relief rally as the recent slowdown had pushed major indices into oversold territory. Traders cover their short positions in several beaten-down stocks, which boost the major benchmarks.
Analysts said positive cues on China in opening up its economy were also helpful. Asian indices such as Nikkei, Jakarta Composite, Shanghai Composite and Hang Seng edged higher by 0.42-3.27%.
Siddharth Khemka, Head of Retail Research, Motilal Oswal Financial Services Ltd, said, “The sharp rise in the market was driven by the short-covering seen in several large-caps and especially in sectors such as metals.” Foreign Institutional Investors (FIIs have also slowed down the pace of selling, he said.
FIIs, who have been net sellers of equities of value 1,54,159.83 crores in 2022 till 16th May, had net sellers of Rs. Shares worth Rs 2,192 crore on Tuesday, according to provisional data of exchanges.
However, the rally may be short-lived, and volatility may remain, as high inflation, costlier crude oil and a rupee at a record low add to market concerns. Data released on Tuesday showed wholesale price inflation at 15.08% in April, driven by a rise in prices across the board, with manufactured products and fuel and power being the key. This is also expected to put pressure on corporate earnings growth.
“Higher energy and metals prices due to supply-side constraints have added to input cost pressures for domestic producers. As inflation is primarily supply driven, we expect upward pressure to continue in the near term,” said Rajni Sinha, Chief Economist, Care Ratings.
On Tuesday, the rupee opened at its lowest level against the dollar. Analysts said depreciating Chinese economic data, further clarity in US Federal Reserve and ECB rates, rising crude oil prices and correction in domestic equity markets led to the fall in the rupee. The cut in India’s GDP estimates has also added to the rupee’s woes.
“The USD-INR spot scored a new high at 77.78, but closed its high at 77.56. RBI and USD/USD in the last few trading sessions,” said Anindya Banerjee, Vice President of Currency Derivatives and Interest Rate Derivatives at Kotak Securities Ltd. There has been a new high and then suspicious interference pattern moving from -INR to unchanged levels.
Looking at the macro-economic headwinds, the currency desk of Emkay Global expects gains for the rupee to be restricted to levels near 77, and the currency may slip towards 78 levels. At $116.03 a barrel, Brent has risen sharply from the closing low of $101.95 a barrel seen on May 10, putting pressure on the rupee.
Chouhan said the rally could be short-lived as FII selling and worries about further rate hikes to check inflation could add to volatility.
Khemka said as concerns over inflation and interest rate hikes could mount, investors would closely monitor the US Federal Reserve chairman’s speech later on Tuesday. Also, investors will keep an eye on the Eurozone GDP data for the first quarter due on Tuesday.
Globally, the Russia-Ukraine crisis and supply disruptions continue to threaten global and Indian equities, said Mitul Shah, Head of Research, Reliance Securities.