Over the last three months, the Indian stock market has been trading cautiously. The Nifty50 index has stayed within a narrow range of 1,000 points, between 21,800 and 22,800. However, this week saw a change as the market broke through this range, closing at a new high of 22,952 and even briefly crossing 23,000. The market’s direction in the short term will depend on the final election results, with high hopes for a major victory by the current government.
Election Results Drive Market Breakout
The recent breakout happened because the market is nearing election day, with just one week to go until the national election results. The pre-election result volatility had caused the market to consolidate, mainly due to foreign investors (FIIs) selling off. These investors chose to put their money in other emerging markets during the election period, which began on March 20 and will end on June 4. During this time, India’s economy slowed down as new policies and spending measures were put on hold. With the MSCI-India index having an 80% premium over the MSCI-EM index, it made sense for FIIs to focus elsewhere. Meanwhile, improvements in the Chinese market, driven by government measures to boost growth and address real estate issues, attracted more investment. FIIs have been net sellers in India over the past two months.
Early Monsoon Boosts Key Sectors
Another factor contributing to the market’s rise is the early arrival of the southwest monsoon, which hit the southern coast this week about two weeks earlier than usual due to a cyclonic storm. This early monsoon has helped underperforming sectors like FMCG and Consumption, which rely heavily on rural demand and input costs. The previous heatwave had negatively impacted agriculture and rural demand-related industries. However, the outlook for FY25 is now more positive due to a strong La Niña effect, which is expected to boost agricultural yields and the rural economy.
Strong Performance in Metals and Other Sectors
Several sectors, including Metals, Power, Capital Goods, Realty, Auto, and Public Sector Enterprises, have also supported the market’s rise to new highs. Metal stocks, in particular, have surged by 30% over the last two months. This increase is driven by signs of recovery in China and high demand for copper in renewable energy projects, compounded by supply issues due to sanctions on Russia, a major producer. Infrastructure, capital goods, and auto sectors have also performed well, thanks to strong domestic demand fueled by government spending and manufacturing growth.
Manufacturing Boom Fuels GDP Growth
Manufacturing companies in India, closely tied to the country’s GDP growth, have outperformed the broader market by four times in the past two months. The GDP growth for FY24 is expected to be 7.8%, significantly higher than the 6.5% forecast in January 2023. Looking ahead, the GDP growth forecast for FY25 to FY30 is between 6% and 7%, with a potential for further upgrades due to strengthening manufacturing policy measures.
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