Nifty crosses 8000: Decoding why markets are on a roll

The NSE Nifty today surged past the psychologically important 8,000 level for the first time to mark its latest record high as India’sgrowth trajectory in FY2015 has started on an improved note, providing the sense that the worst may actually be over.

While the BSE Sensex closed 250 points higher at 26867, the NSE Nifty ended 80 points higher at 8035.

Here are 5 reasons why the markets are hitting record highs:

1. GDP at 5.7 percent: The after-glow of Narendra Modi’s election victory nearly four months ago helped India’s lumbering economy register its fastest growth in two-and-a-half years for the quarter ending in June. India’s GDP growth for the period April to June 2014 has come in at 5.7%.

“We are at the starting point of the pickup in the growth cycle in India,” said Sonal Varma, an economist with Nomura. She expects the economy to expand 6 percent year-on-year in the fiscal year to March 2015, higher than 5.5 percent estimated by the Reserve Bank of India and faster than a near decade-low of 4.7 percent last year.

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A CLSA analysisof 10 indicators of consumer confidence indicates that more are pointing towards improvement than those that are lagging. Improving indicators include car sales, airline traffic, jobs index and toll road collections.

2. Oil prices at one -year low: The international crude oil prices are benign (Brent around $103 per barrel today). This is a major relief to the government as lower oil prices means lower import bill and lower losses for public sector oil companies.

According to a government press release, under-recovery, which is the losses incurred by public sector oil companies on account selling fuel at below the market rates, in diesel has fallen to a just 8 paise per litre for the fortnight starting today (1 September ). The combined daily under-recovery on sale of diesel, PDS kerosene and domestic LPG is estimated at Rs 195 crore, for the first time below Rs 200 crore.

The lower oil prices also mean that the government can speed up reforms in the fuel pricing, which will help it improve its fiscal health. It also gives rise to hopes thatinflation will moderate further, easing the pressure on the Reserve Bank of India to hold the policy rate at an elevated level. On the whole, lower oil prices will boost the economic growth, companies’ earnings and returns from equities.

3. Foreign inflows: Modi has promised to make it easier to do business through speedier clearances and stable tax policies, giving investors hope of a rosier future after years of low growth and high inflation. That hope has led to a marked increase in foreign capital inflows to the country - even before the election - making Indian shares the best performers in Asia this year.Foreign institutional investors remained aggressive buyers in Indian equities infusing around Rs 77,684 crore in the past seven months since February and Rs 6,408 crore for this month till August 26.

In fact, net investments by overseas investors into India so far this year reached $30-billion level, while their cumulative total inflows into the country crossed $200-billion mark.

Some sustained buying is also seen in domestic mutual funds, which implies that retail appetite is back.In the last three months ( June, July and August) domestic mutual funds have consistently been buying stocks. In June, MFs bougt stocks wirth $553 million. This figure has gone up to $962 million in August.

4. LIC push: The biggest domestic player in the Indian equities market has enough money to support themarket through thick and thin. According to a report in T_he Economic Times_, the life insurance behemoth has been selling shares of bluechips in the current market rally. It plans to further sell about Rs 15,000-20,000 crore of equities.The company has already said that it will invest about Rs 50,000 crore in Indian equities this year. But with the money it is raking in from the current rally, the hoard can be much more than this. What this means is that even if the government pushes its Rs 60,000 crore disinvestment through, investors need not be worried about a supply glut. LIC will have enough money power to absorb the share floats.

5. Coal verdict:However, the recentjudgement of the Supreme Court that allocation of coal blocks since 1993 are illegal raises the issue of sustaining the growth momentum. Such retrospective action can impact investment sentiment but it seems that markets have priced in the fact that the apex court will not cancel all licences and may impose penalties instead, in which only specific stocks are likely to get affected.